A Credit Score is a numerical value that represents sole creditworthiness. The credit score is based on Credit Report. A credit report is all the information such as the number of open accounts, balances due, details of your payment history, and how a person managed his or her credit in the past.
What is Credit Score
In simple credit score is a number that ranges between 600 and 900 which represents creditworthiness. Higher the credit score than there will be higher chances of getting loan approvals and other financial supports from lenders.
Credit Score plays an important role in the lender’s(banks, credit card companies) decision to lend credit.
In India, there are four credit information companies authorized by the Reserve Bank of India (RBI).
- TransUnion CIBIL Limited ( The Credit Information Bureau (India) Limited )
- Experian Credit Information Company of India Private Limited
- Equifax Credit Information Services Private Limited
- CRIF High Mark
All four credit information companies have made their individual credit scores, the most common is the CIBIL credit score.
The CIBIL credit score is a three-digit number that shows an outline of a person’s credit history and credit rating. CIBIL score ranges from 300 to 900. An individual with no credit history usually has a -1 credit score. If the credit history is below six months, the score will be 0. It takes between 18 and 36 months or more to build a CIBIL credit score.
How Credit Score Works?
Credit Score is calculated by the credit information companies. Each credit company uses its own algorithm to calculate credit scores. It is computed after taking some factors into consideration like payment history, credit usage, credit duration, and credit type.
Let’s take a look at all of these factors and how these factors contribute to calculating credit scores:
- Payment History contributes upto 35% – If you have been regular in paying your bills, EMIs. This says that you are a responsible person and are at less risk of defaulting. Responsible credit behavior will also make you eligible for lower rates of interest on loans and fast approval on your applications.
- Credit Usage Ratio contributes upto 30% – credit Usage ratio refers to the total amount of credit you have used in part to the total credit limit available to you. The credit usage ratio is calculated by dividing your gross remaining balance by your total credit limit.
- Credit Duration contributes upto 15% – Long Credit History considers less risky because more data is available to determine the creditworthiness of the person.
- New Credits contributes upto 15% – If you have applied for too many credit this puts negative impact on your credit score.
- Credit Types contributes upto 10% – It is crucial to maintain a good balance of secured as well as unsecured credit. A credit card is an example of unsecured credit and home or car loan of secured credit.
Benefits of having a good Score:
- Quick Loan Approvals – The lender will check your score before giving you a loan. If you have a decent CIBIL score, the lender will see you as a low-risk customer. This betters your chances to get a loan.
- Appealing Rates of Interest – If you have a very good score the lender may offer you good rates on your loan. You can also negotiate the available rates and get a good deal.
- Easy Access to Credit Cards – Lenders will check your score before issuing you a credit card. So, if your score is high, getting a card won’t be difficult. Because your credit history will show all the repayments you have made towards your loan.
How you can improve your Credit Score?
- Make repayments before the due date.
- Use different types of credit. Using one type of credit may have a negative impact on your credit score.
- Try to take one loan at a time.
- Not to over-utilize your credit card. Keep credit usage ratio between 30-40%.
- Maintain older credit cards because it helps to maintain good credit history. Longer credit history will be beneficial for your credit score.
- Keep a check on your score report if you spot any errors correct them.
- Consider long-term loans, because it has less interest rates and its easy to repay.
1] What is CIBIL Score?
CIBIL Score is a 3 digit number that ranges between 300 to 900.
2] What is an Ideal Credit Score?
750 and more consider an Ideal Credit score whereas, 900 denotes maximum creditworthiness.
3] Are CIBIL scores and Credit scores are same?
YES, CIBIL score and Credit score are the same. CIBIL score is often used as a Credit Score and vice versa.
4] How to Check Credit Score?
By visiting the Credit information companies website. Usually, there is a small amount of fee to check credit score.
5] What are the factors that affect your Credit Score?
Existing Debts, Your Income, Repayment history, any defaults and delays, past rejections of loans.