In the last 10 years, the popularity of credit score has increased exponentially. While earlier only lenders used it when they received a loan/credit card application, now even the borrowers have become prudent and started checking their credit score on their own before applying for credit.
But while checking credit score is important, knowing the factors that affect credit score is also necessary, as only after knowing what affects your credit score, you would be able to act responsibly towards those factors.
Following are the factors that affect the credit score: Payment history: If you have paid all your loan EMI’s and credit card bills on time for your existing/previous accounts. Number of hard enquiries: How many times you have applied for a loan/credit card with a bank/lender. The lower the better. Portfolio age: How old your loan or credit card accounts are. The older the better. Credit card utilisation ratio: How much percentage of your credit card limit you have utilized for each credit card. Ideally, it should not exceed 40 percent. Borrowings mix: The mix of secured credit (that requires security) and unsecured credit (that doesn’t require security) in your portfolio. The mix should have both secured and unsecured credit Credit Score and Length of Credit history
You must be receiving a plethora of offers pertaining to the best credit cards in the market which offer unlimited rewards and cashbacks with no additional cost. And these credit cards are in fact better than the credit cards we possess. So, allured by these propositions, we sometimes opt for these cards by closing our existing credit cards.
But there is one thing you need to consider before closing any credit card account: Is your average age of accounts reducing considerably. As mentioned above, the length of your credit history has some effect on your credit score.
Banks/lenders usually check your average age of accounts when you apply for loan or credit card. This is done to view how consistently you have been making payments on your dues.
If you have been a responsible credit user in the past for a consistent period, lenders will view that as a healthy sign that you would be able to repay their dues as well.
If your average age is low, lenders won’t be able to determine your consistency in repayments, which could affect your interest or approval chances.
So, if you close your old credit cards on which you have been making regular repayments and open new ones in their place, or open multiple new credit accounts within a short duration, your average age of credit accounts will decrease, which would have some impact on your credit score.
Having said that, repaying your dues still has more weight on your credit score than the length of your credit history. So, if you can foreclose a loan with no substantial fee, you should definitely opt for that as you won’t have defaulted on that loan.
As the length of your credit history has an effect on your credit score, you should be cautious before opening new credit card accounts by closing the old ones on which you have consistently been making payments, or opening multiple new credit accounts at the same time.
Ranjit Punja is the CEO and co-founder of CreditMantri.