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What is a credit score?
Credit score is a number that shows the probability of paying credit back to your lenders – banks & credit card companies. The lenders treat your credit score as the cornerstone for risk measurement, when deciding whether to give you credit or not. The higher your credit score the more likely you are to receive credit from lenders.
What is a good credit score?
A good credit score ranges from 750-900. If you have a score of 750 and above, banks and other NBFCs consider you to be credit healthy. A score of less than 750, banks feel it is as a risk to provide you a loan or credit card. Banks and other NBFCs are comfortable with approving loans to customers who have a score of 750 and above.
There are 4 credit bureaus in India which are authorized by RBI- You can choose to get your credit score online from the websites of any of the bureaus- Equifax, CIBIL, Experian, CRIF High Mark.
How to improve your credit score?
In case you have a low credit score, all you have to do is to improve your credit score by following a few steps.
- Make payments for your loan dues on time
- Maintain a balance between secured and unsecured loans
- Reduce the number of loans you borrow in a particular year
- Ensure that your debt-to-income ratio is low
These are a few easy steps which help you to improve your credit score. Which can then help you in improving your credit history. And the better your credit history, the better your credit score will be.
What are the benefits of having a good credit score?
With a good credit score, financial companies provide you with a lot of benefits, such as low-interest rate, higher loan amount, quicker loan approval process and higher repayment period. To enjoy all these benefits, the eligibility criteria is having a credit score of 750 and above. With a good credit score, you can enjoy all the benefits.
How is credit score calculated?
Credit score is calculated on a number of factors, especially on your payment history. Your repayment track record contributes to 35%+ of weightage while computing the credit score.
In addition, your credit score is also calculated based on:
- Your total available credit balance
- The balance between your secured and unsecured loans
- Number of loans and credit cards you have
- Credit utilization
- Plus a variety of other factors
A credit scoring algorithm is then used by credit bureaus to calculate your credit score. Your credit score not only helps lenders assess your loan eligibility, but it also helps them understand if you are worthy of credit. The higher your credit score, the higher are your chances to get your loan approved.
What is a credit report?
A credit report is a history of your credit behaviour and contains detailed information on all your loan and credit-related transactions with banks, credit card companies and other lenders. It may contain details of your credit activity from 7-10 years earlier as well.
What kind of information does your credit report contain?
Your report will include the following details, among many others, that lenders pay attention to when deciding whether to approve your loan:
1. Percentage of on-time payments: Every time you make or miss a payment, your lender reports it to the credit bureau, which in turn makes a note of it on your report. If your credit report shows a consistent pattern of making all your payments on time and in full, then potential lenders feel confident that you will not default on your loan payments and will be inclined to approve your loan application.
However, if you have a large number of missed, delayed or partial payments, there is a good chance that your loan application will be rejected. The greater the number of incomplete payments, the lower your chances of being approved.
2. The number of credit accounts and total credit limit: If you have too many outstanding loans or credit card accounts, lenders might get the impression that you are short of funds and need to apply for credit from multiple sources. However, it is also important to note that having too few credit accounts mean lenders will not have enough information about your repayment behaviour to make a lending decision. Similarly, if you have a high credit limit, it signals that lenders view you as a safe customer.
- Age of the credit accounts: The longer you have a credit history, the more information there is for lenders to judge your repayment pattern. If you have a very young credit history with few repayments to show, lenders will be unwilling to make a decision since they have insufficient data to determine your track record in making payments.
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Credit score: Credit bureaus use a complex mathematical formula based on the above data plus many other factors to calculate your credit score. In India, the score ranges from 300-900. If you have a high score (above 750) you stand a good chance of being automatically approved for a loan and will be eligible for more attractive terms.
It’s super important that you maintain a good credit score given strict mandates from RBI and financial institutions, as it helps you enjoy a wide variety of financial credit services.
