A credit score refers to a numerical representation that is decided by financial institutions and lenders. The score is meant to display your credibility or your potential to repay the loan, debt, or mortgage. There are 4 major kinds of credit bureaus that form this score. The credit bureau of India includes Experian, CIBIL CRIF Highmark and Equifax. They are also known as credit rating agencies in India.
How does credit score function?
An individual’s score is generally expressed as a 3-digit number ranging from 300 to 900 determined based on your repayment history, your credit files, loan history and others. Banks and lending institutions tend to check out this number when you place an application for a loan or credit card to decide your credit risk. This infers the likelihood of whether you will repay the full bill on time if your loan or credit card application is approved.
Your score will even impact the loan proceeds that may be approved and the rate of interest for the same. In the case your score is low, the lender might even turn down your application loan or credit card.
How is your credit score computed?
As already stated, your credit score is the number ranging between 300 and 900. Small businesses and big businesses even tend to have a score. A credit score is computed based on an algorithm. This algorithm makes use of information like your payment history, the debt amount, and credit history length. The parameters that are factored in involved –
∙ Mix of credit
∙ New credit enquiries
∙ Credit duration
∙ Credit utilisation
∙ Payment history
What else must you know about your credit score?
In India, the RBI (Reserve Bank of India) has licensed 4 credit information companies. These include –
∙ TransUnion credit information bureau limited or CIBIL. This is one of the initial credit bureaus in India and their score ranges anywhere from 300 to 900.
∙ CRIF Highmark is a full-service credit bureau founded in the year 2007. CRIF score ranges between 300 and 900.
∙ Experian – This too is a multinational credit reporting company that began in India around 2010. The credit score range of Experian is anywhere from 300 to 850.
∙ Equifax – This credit information company basically is a joint venture with Equifax Inc. USA. The score of Equifax range anywhere from 300 to 850.
Financial institutions and banks can simply enquire with such authorised credit bureaus to obtain the abridged credit report concerning you or your business credit history when assessing your application for a loan.
What’s a good score?
Distinct credit bureaus undertake distinct scoring models when computing the credit score, so yours might differ depending on which bureau furnishes your report. In general, the score ranges in the following manner –
|Between 300 and 600||Poor|
|Between 601 and 700||Fair|
|Between 701 and 800||Good|
|Between 801 and 900||Excellent|
A credit score of over 700 and 750 is termed as good and a score of exactly 750 is termed as an ideal score. However, every financial institution comes with its own degree of risk. For instance, one bank might consider a credit score of over 700 as good while another bank might consider a credit score of over 750 as good. In general, a credit score of anywhere between 750 and 800 must be your target score.
Also Check: Credit Rating Agencies in India
Why do you require a strong credit score?
As banks and other financial institutions use your score to evaluate how worthy you are for credit approvals, it is necessary to hold a strong score. If you hold a higher score, it infers that you are disciplined with your credit behaviour. This might assist potential lenders to have higher confidence when approving your credit request. You may even get other advantages like a lower rate of interest, better repayment terms and a faster loan approval procedure.
Distinct lenders might even emphasise distinct aspects of your score like your payment history and your mix of credit.
How to evaluate your score?
The RBI has made it compulsory for all 4 credit bureaus to check your score online and for them to offer one free report every year.
Here’s how you can consider checking your score for free –
∙ Step no. 1 – Visit any of the credit bureaus’ websites, like CIBIL, CRIF Highmark, Experian and Equifax.
∙ Step no. 2 – Login using your credentials or form an account using info like contact number, name, and email address.
∙ Step no. 3 – Fill out the provided form with all requested information in detail. A few of the requested information includes your UID or PAN number.
∙ Step no. 4 – Once this is done, hit on the submit button to submit the form.
∙ Step no. 5 – You must then get an email to your mail id so that your identity is authenticated.
∙ Step no. 6 – Once authenticated, you might be asked for more info that might be required like questions about your credit cards or loans, if any.
∙ Step no. 7 – Once this is done, your report will get delivered to your email ID.
In the case you are one of those looking to evaluate your score more than once a year, then specific bureaus will allow you to do so if you pay the fee payment of the report. Moreover, a good time to review your score is every three months as doing so allows you to understand where your stand credit-wise and if you are well, then continue with your credit-healthy behaviour. In the case, you are not, then consider figuring out the areas where you lack or not performing well credit-wise and improve them accordingly.
How can you ameliorate your score?
To make sure that your score stays within the higher limit and to avoid a weak score, it is crucial to be aware of specific parameters that can impact it. These might involve avoiding things such as missed or late payments and a high CUR (credit utilisation ratio). Always, ensure to keep your CUR within 30 per cent.