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5 Vital Factors That Are Responsible For Bad Credit Score & How To Avoid Them

Team Jar
June 14, 2022
5 Vital Factors That Are Responsible For Bad Credit Score & How To Avoid Them

A credit score has the power to affect your present and the future. A bad score can rob you off many lucrative opportunities. Know what factors can affect your credit score and how to avoid/improve them.

Have you ever lent any of your friends or relatives money before? The key question that goes through your mind must be, 'Will I get it back?' Isn't that right?

That is the same for money lenders who give out loans or credit cards. That's where credit score comes into the scene. It is used to measure whether an individual's financial stability and creditworthiness.

The credit score is the most robust three-digit number that defines an individual whether they are a risky borrower.

Credit card companies, loan departments of banks, digital money lenders, and companies that offer EMI facilities commonly check the applicant's credit score before deciding whether to provide a loan, how much to offer and at what interest rate.

In many countries, landlords, insurance companies, and utility services providers also check this score to determine how financially responsible the individual is.

Get to Know Credit Score A Bit Better

The credit score can directly impact your financial health. It is measured between 300-900.

The higher you are on this scale, the better your credit score is. Make sure your score doesn't dip below 750.

Here's why.

The minimum requirement for availing a loan, EMI, or credit card is 750. A person's loan or credit card application with a credit score below 750 gets automatically rejected.

Most money lenders consider 850 as an appropriate credit score for offering credit. To know how beneficial a good credit score is, read our blog about the road to good credit score. Apply for a free credit report and check it every month.

What Affects Your Credit Score?

If you have a bad credit score, know that you may not qualify for loans, credit cards, or EMI facilities. I'm sure you are curious about what impacts your credit score.

Let's discuss the factors that play a major role in leading to a low credit score and how you can improve it.

1. Your Payment Regularity/Payment History: Weightage: 35%

A money lender or a credit card provider always checks this factor in detail. It essentially means how disciplined you are with your repayment. They check for the following:

  • Have you made the payments of every credit type on time?
  • Have you ever paid late payment fees? If yes, how often. Late fee is a critical red flag for any money lender.
  • If you have paid late, how late were you? 30 days, 60 days, 90+ days?
  • How many of your credit accounts have gone to the collections department?
  • Do you have any debt settlements, bankruptcies, foreclosures etc., in your name?
  • How long has it been since the negative incident with your credit score? You will be less of a risk if it is more than 5 years.

2. Credit Utilization Ratio: Weightage: 30%

It is one of the five major factors responsible for your poor credit score. The credit utilization ratio means how much credit you have used from your available credit limit. Maxing out your credit card is a very bad sign for any money lending company. 

They check your outstanding balance of your total credit limit. In this case, the less you owe, the better. For instance, person A has used ₹5000 from his ₹50,000 credit limit.

On the other hand, person B has used ₹30,000 of his ₹50,000 of balance. Naturally, the money lender would prefer person A for his responsible financial behavior. Experts suggest keeping your credit utilization ratio within 10-15% to maintain a good credit score.

3. The Age of Your Credit History: Weightage: 15%

Your credit history makes up for 15% of your credit score. It shows how long you have been a credit user. The length of the credit history shows a money lender whether you can handle a loan and pay your bills in a timely way. 

Therefore, the longer your credit history (if not marred by late fees and high interest), the higher your credit score and the better your chance of getting qualified for more loans or better credit cards.

4. Credit Mix: Weightage: 10%

There are primarily two types of credit: Revolving credit and installment credit.

Revolving credit is a type of credit that lets you repeatedly borrow up to a set limit with an expectation that you will return the borrowed money within the set timeline. We know what you are thinking. That's right. Credit card is a revolving credit.

On the other hand, installment credits are those types where you borrow an amount in a large sum, and you have to pay it back every month in a fixed amount—for instance, personal loan, home loan, auto loan, education loan, or agricultural loans.

Having a mix of both types of credits shows a lender that you can handle both well. The software that scores your creditworthiness likes to see that you have a healthy mix of credit accounts. This is also known as credit mix. It weighs 10% of your credit score.

5. New Credit: Weightage: 10%

It is one of the two lesser important factors that cause bad credit history. Important nonetheless.

Whenever you apply for a new loan or new credit card, the money lender has to make a hard inquiry and check your credit report afresh. 

This temporarily dips your credit score. The drop can last up to 24 months. One or two credit inquiries don't affect much.

But if your credit report shows multiple credit applications, hence hard inquiries, it's a red flag.

How To Improve Your Bad Credit History

Improving bad credit is very difficult. Sometimes, it takes years. But, with good credit management habits, you can overcome this hurdle and rebuild your credit score afresh. Here's how:

Pay Your Bills Regularly & Don't Miss Your Payment Date

The most effective way to improve your credit score is to develop a habit of paying your dues on time, every time. Set a reminder to begin with.

Soon, it will become your second nature. You'll not forget the payment dates.

This is one of the valuable responsible credit habits that can keep you away from missing your credit card payment due date.

Thus, it will also help you to avoid paying late fees and high-interest rates.

Never skip your repayment, even if you are in the middle of a financial crisis. It will only intensify your problem.

If you are finding it hard to keep paying a high-interest rate, get in touch with your credit card issuer or loan manager and arrange a payment plan that suits your financial situation.

To know interesting hacks to ward off paying penalties, read the beginner's guide on avoiding credit card penalties.

Pay Within The Statement Period

When we say pay your dues on time, what do we mean by that? It's very simple. In the case of credit cards, your billing cycle is 30 days.

But the company offers you 55 days of interest-free period. 

For instance, if your billing cycle is from 10th June 2022 to 11th July 2022, you can pay your dues without any additional interest up to 7th August 2022.

The only stipulation is you have to pay your entire outstanding balance. The minimum payment due is subject to interest.

Examine Your Credit Report & Report Errors

Making mistakes is human nature. But when it comes to your credit report, a small mistake can cost you a lot. A small mistake in your credit report can dip your credit score immensely. 

Therefore, be vigilant about checking your credit report. If you find even a small error, be sure to report it and get it rectified immediately.

Get Secured or Rebuilding Credit Cards

Many banks and credit card providers have a range of specialized credit cards for those who have poor credit scores.

These are called secured cards or rebuilding cards. These credit cards help you to rebuild your credit score.

Secured or rebuilding cards are issued against collateral like bank fixed deposits.

If the borrower fails to pay their bill for 90 days and more, the lender has the right to recover the borrowed money from the fixed deposit.

Repair Your Credit Score

The quickest way to improve your credit score is to take help from a credit repairing company. These companies are third parties who can boost your credit score for a fee within 8-12 months.

This comes in handy, especially when you need to invest in something major and cannot wait many years to become eligible for a loan.

Final Thoughts

The credit score is instrumental in becoming qualified for loans, credit cards, and many other credit facilities.

However, you do not need to obsess over it. Allow your payments to be auto-debited from your account to avoid forgetting payment dates.

Overall, follow responsible credit habits, and your credit score will shine.