Credit Score

Credit Score

A credit score is a measure of one’s creditworthiness. A higher credit score indicates a better ability to repay a loan. Additionally, it can get faster loan approvals, cheaper interest rates and better bargaining power. Whereas, a lower score will reduce the probability to get credit cards and loans. Needless to say how important it is to keep up your credit score. In this article, we have covered all about credit score in detail.

 

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What is a Credit Score?

A credit score is a measure of an individual’s creditworthiness. In other words, it means an individual’s ability to repay the borrowed amount. It is a three-digit number ranging from 300 to 900, with, 900 being the highest and 300 being the lowest.

Having a high credit score can help individuals get loans and credit cards faster. Additionally, it can help one get loans at a cheaper interest rate, or higher loan amount, or they get to choose the tenure to repay the loan.

Credit score calculation of an individual is done after taking into account several factors. Some of them being, credit balance, new credits, tenure, credit mix, credit utilisation, repayment history and credit enquiries. Major Credit Information Companies like CIBIL TransUnion, Experian, Equifax and High Mark compute credit score in India. Reserve Bank of India has mandated all banks to pass on any transaction related to calculating credit score to these four companies. The companies calculate the score based on the data provided and make detailed credit reports. Thereport is like a financial report card, and it contains the credit score of an individual.

You must always check it from time to time. This will ensure one knows their chances of getting a loan. Additionally, individuals can keep track of their score and report any mistake in the calculation (if any) to the Credit Information Companies.

What Impacts Your Credit Score?

The credit score of a person depends on various factors. Primarily it reflects an individual’s credit behaviour. This includes credit repayment history, frequency of loan application or credit card application, a mix of secured and unsecured credit, etc. Following are some of the major factors that have an impact on a person’s credit score:

Repayment history

It means credit repayment history. In other words, timely repayments of bills, EMIs, etc. have an impact on the credit score. Missing any payments will harm the score and also on the ability to secure a new credit in the future.

Credit utilisation ratio

The credit utilisation ratio is the total amount of credit taken by the available credit limit. A high ratio indicates high repayment burden, and this harms the credit score. On the other hand, a low credit utilisation ratio (30% or less) implies high creditworthiness for a lender. Also, one can avail additional credit with ease.

Simultaneous credit card and loan applications

Usually, new loan or credit card applications trigger enquiries from the lenders. Also, these enquiries by the lenders show in the credit report, which in turn has an impact on the credit score. Therefore, multiple hard enquiries hurt the credit report.

Credit Mix

Having the right mix of secured and unsecured loans is a good practice. For example, having too much of unsecured debt such as credit card bills or outstanding personal loans will have an impact on the score. Having a high unsecured debt reflects on the credit behaviour of mismanagement of personal finance. Hence, it’s good to have a mix of secured loans (home loan, gold loan, loan against property, mortgage loans, car loan, business loan) along with some unsecured loans (student loans, credit card debt). This helps in maintaining a good credit score and also increases the chances of getting new credit.

Frequently increasing the credit card limit

Frequently requesting for an increase in the credit card limit will result in too many hard enquiries. The more number of hard enquiries will adversely impact the credit report and the score. Also, the potential lender may perceive this as high chances of credit default in the future.

Credit reporting error

Incorrect information in the credit report will hurt the credit score. For example, incorrect default payment information, loans or credit cards assigned, mistakes or errors in personal information, etc. Moreover, delayed or inaccurate reporting by banks can also hurt the score.

No Credit History

Credit history is determined on the basis of credit behaviour, credit utilisation limit, repayment history, etc. Having no credit history will have a negative impact as the lender doesn’t have any proof to determine and estimate the risk of non-repayment.

Unable to fulfil the loan guarantor role

As a loan guarantor if an individual is unable to fulfil the liability of someone else’s loan default. This will harm the loan guarantor’s score. In other words, the primary borrower fails to fulfil the loan obligation and then the loan guarantor also fails to repay. The credit score of the loan guarantor will have a negative impact.

Credit Score Range and How to Interpret it?

The credit score ranges between 300-900, and one must ensure their score is closer to 900. This will ensure they will get good deals on their loans and credit cards. Understanding credit score and interpreting it will help in obtaining loans quickly. Following are the ranges and their meaning:

No HistoryNo Credit History
300-549Defaulted Payments
550-649Average
650-749Fair
750-900Excellent

No History (NH) /Not Applicable (NA)

For the Credit Information Companies to calculate a credit score, they would need information. If a person has no credit history, then the score will be NH/NA.

300-549

A credit score in the range of 300-549 will indicate that the individual has defaulted payments in the past and has unpaid dues. It also indicates that the individual is not a responsible borrower.

550-649

A score in the range of 550-649 is considered as average, and one has to take measures for building it. It is difficult to get credit cards and loans with this Want to learn about Finance, Investing, and much more!, Checkout our partner blogs.