Here’s All You Need To Know About Credit Scores
Learn everything about this financial health score and how it can help you manage your money.
Your credit score is an important financial data in your life. A mere 3-digit number plays a vital role in deciding the kind of loans you can avail and which credit card variant you are eligible for.
What is this credit score and why does it have the power to dictate my creditworthiness? Let’s find out.
A credit score is a numerical assessment of a person’s creditworthiness.C redit scores are used by lenders to determine how much credit to offer. They also help predict how well you will manage your credit in the future.
It ranges from 300 to 900, and is issued by 4 major credit bureaus in India – Transunion CIBIL, Experian, Equifax and CRIF Highmark. In recent times, FICO has also started issuing credit scores to Indians where it scores individuals from 300 to 850.
How Is My Credit Score Calculated?
Your credit score is calculated from the information supplied by the various lenders when they offer you credit. This can include information like your credit card statements, the loans you have taken from banks and other lenders, and the credit apps you have applied for. The score is based on the information you have provided to the credit bureaus, so it reflects the truth. Each credit bureau has their own credit score calculation model based on different algorithms.
Credit Score & Credit Report
A credit score, also known as a credit rating, is a numerical evaluation of a person’s creditworthiness. A credit score is often used as a predictor of future credit ability and is the primary factor used in lending decisions, which are usually made by underwriters.
A credit report is a record of the history of your credit, updated each month. Your credit report can include information such as your payment history, your credit history, and your current credit score.
The two are very similar, however, credit reports show more financial information. Credit Bureaus gather information about your credit, such as your payment history, to provide a credit score.
Where Can I Find My Credit Score?
Every individual is entitled to get his credit score from any of the credit bureaus. All 4 credit bureaus have a customer portal, where you can login and access your credit score along with a detailed credit report. While the first credit score is usually free, subsequent credit reports are accessible for a nominal fee.
Most banks and NBFCs also offer your credit score for free, as part of their marketing initiatives. You can visit any of the leading banks or NBFC’s website and get your credit score.
You are usually required to enter your name, mobile number and PAN number to access your credit score. Some providers only give you your credit score, while few services, like CreditMantri, offer a comprehensive ‘Credit Report Analysis’ along with your credit score. This report points out areas where you may need to improve in order to achieve a better credit score.
What Is A Good Credit Score? And, What Is Considered A Bad Credit Score?
In practice, a credit score of 700 and above is considered a good score. This score lets you access the best interest rates and terms offered by the banks and NBFCs. Be it home loans, personal loans, car loans, or credit cards, an applicant with a credit score of 700 and above can get some of the best offers and benefits on their respective products.
600 and below is considered a bad credit score. This score makes it difficult for you to get any kind of credit. Even if you are offered a loan with such a low score, you will have to pay a higher rate of interest and higher processing fees. So we always suggest our users to first build a good credit score, and then apply for a loan.
What Are The Factors Affecting My Credit Score?
Your credit score is a reflection of your credit management prowess. Lenders want to see how good you are at managing your own finances. Are you able to make repayments on time? Are you borrowing more than your income? Are you prudent with your savings and investments? These are some of the factors that affect your credit score.
1. Repayment History: This is the key factor that lenders look at when assessing your creditworthiness. Paying bills and EMI on time is a key factor in building your credit score. For lenders, an individual with an impeccable repayment record is a better bet than someone who is late every time. So, your repayment history weighs in about 30% of your credit score.
2. Credit Utilization: This is the amount of credit that you have used in relation to your credit limit. A person may have a very high credit limit; sometimes, it is even multiple fold higher than one’s salary. But how much credit is he/she utilizing out of it? Are they staying within their income limit or going beyond that? If they are using beyond their repayment capacity, how often do they do that? An individual who is aware of his repayment capacity is a good sign for lenders. So your credit utilization ratio weighs about 20% of your credit score.
3. Debt-to-Income Ratio: This factor considers your total availed debt against your income. If you have a high debt-to-income ratio, it means that you are not able to pay off your debt easily. Are you applying for more credit when you are already having high debts? That does not bode well with lenders.
4. Length of Credit History: This is the number of years you have been in the credit cycle. There has to be enough history to arrive at your credit score. Someone who has just started earning may not have much credit history. So their credit score is generally marked an ‘NA’ or “NH”. That is why it is important to get credit cards early on in life and use them judiciously, to build your credit score.
5. Good credit mix: One should have different kinds of credit under their name; installment loans, credit cards, lines of credit, overdraft facility, and more. A good mix of different kinds of credit will indicate that you are a responsible borrower. And lenders are more likely to approve your loan faster.
Can I Improve My Credit Score?
Definitely! Your credit score keeps changing with your credit habits. So, all you need is a few tweaks to your credit management to improve your credit score.
– Pay all your bills and EMIs on time, every time
– Don’t apply for any new credit card or loans frequently
– Close down any long standing debts or loans that are eating up your credit limit
– Never use more than 50% of your credit limit in a given month
– Don’t cancel old credit cards. Make nominal transactions on each one of them to keep your credit limit active.
In today’s world, credit is everything. So one has to be up to date with their credit report and credit score. Lenders have become more and more sophisticated at evaluating credit and look for better ways to predict future creditworthiness. A good credit score will help you get a better interest rate and make your borrowing more affordable.