How Does Credit Score Work?

Credit Card
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How does credit score work?

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A credit score is basically a three-digit report card that banks use to judge how safe it is to lend money to you. Every time you apply for a loan or credit card, the bank will go to your credit report and check your score.

The score is between 300 and 900, with anything above 750 indicating that you are a trustworthy person for lenders to lend money to.

Here are 5 major factors that affect our credit score:

  1. Your repayment history has the biggest impact on your credit score. Regular, on-time payments for loans and cards have a positive impact that can easily improve it.
  2. The next is how much outstanding amount you are carrying compared to your total credit limit. If it is above 30%, it may drop the score.
  3. The next thing is the age of your first loan or credit card. A longer history and responsible borrowing are always helpful.
  4. Every time you apply for new credit, the lender reports it to the credit bureau. Too many inquiries can make your future approvals tough.
  5. Finally, the mix of credit matters. Banks prefer borrowers with a mix of both secured and unsecured loans.

So, if you make timely payments, use credit wisely, and do not apply for too many new loans and credit cards every few months, your credit score stays healthy.