Why is My Credit Score Never the Same?

Credit Scores play a considerable role in the approval or rejection of your credit or loan applications. If you are a credit card user, you would be aware of how important this three-digit number is. For those who don’t know, a credit score is a three-digit number that helps card issuers/lenders determine the creditworthiness of an individual. Whenever you apply for a credit card or a loan, the lenders don’t approve or reject your applications randomly, but they do it on the basis of various factors. Your credit history is one of the most important factors here. If you check your credit scores regularly, you might wonder why your credit score keeps changing and is always different. This is not something to worry about until your credit score is going down gradually. In this article, we will help you understand why your credit score never remains the same and how you can maintain it. Keep reading for further information:

How is Credit Score Calculated?

Credit Score is calculated by the credit bureaus, which collect your information from different lenders or card issuers and prepare a report based on the same. There are four major credit bureaus in India: Transunion CIBIL, Experian, Equifax, and CRIF Highmark.  Your credit score is prepared on the basis of five factors, including your payment history, credit mix, credit utilization ratio, the average age of accounts, and the number of hard inquiries on your credit profile. You can understand all these factors in detail below:

• Payment History: Your payment history makes up 35% of your credit score, and hence, it is the most important factor that determines your credit score. The more payment defaults you make, the more the chances of having a terrible credit score. 
• Credit Utilization Ratio: The credit Utilization ratio is the of your total credit limit to the used credit limit. It makes up 30% of our credit score and is the second most important factor affecting our credit profile. It is advisable not to use more than 30% of your total credit limit.
• Credit Mix: Having a good credit mix also results in an improved credit score. It means having a good mix of different types of credit cards and loans increases your credit score.
• Average Age of Accounts: The average age of your accounts also plays an important role when the credit bureaus calculate your credit score. Therefore, the longer your credit history is, the better your credit score.
• Hard Inquiries: Every time you apply for some kind of credit or loan, the lender checks your credit report and this check is known as a hard inquiry. Hard Inquiries impact your credit score negatively, and this is why it is not advisable to apply for credit cards very often.

Why Does Your Credit Score Keep Changing?

Many people are confused when they observe that their credit score is never the same, and it seems to be different every time they check their score. But there is nothing to worry about. As discussed earlier, your credit score depends on five factors, and any change in these things might result in a change in your credit score. For example, you only had one credit card earlier with a credit limit of Rs. 1 lakhs, but now you have two credit cards with a total credit limit of Rs. 2.5 lakhs. Now, as your total credit limit has increased, your credit utilization ratio will go down, and your credit score will eventually go up. Moreover, the average age of your accounts also keeps increasing with time, which can add up to a few points to your credit score. Similarly, if your payment behaviour changes, your credit score may increase or decrease accordingly.

Bottom Line

You might already be aware of what a credit score is, but knowing its definition is not enough. It’s something very crucial, and hence, you should always try to increase your credit score. This doesn’t only help you get approved for credit cards, but with a good credit history, your chances of getting approved for bigger home/mortgage loans increase. Talking about the changing credit score, there is nothing wrong if your credit score increases by a few points every time, but you need to pay attention if it is decreasing. Try to find out what can be the reasons for your decreasing credit score and work accordingly to improve it. If you have any additional doubts, let us know in the comments below!