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Credit Score – Importance & Benefits You Must Know

What is meant by a credit score?

A credit score is a numerical representation that is decided by financial institutions and lenders. It is meant to show your credibility or your potential to repay the mortgage, loan, or debt. In India, there are 4 credit bureaus that deal with preparing credit scores. They are TransUnion CIBIL, CRIF Highmark, Experian, and Equifax.

How does credit score function?

A credit score is generally expressed as a 3-digit number ranging between 300 and 900, wherein the closer your credit score is to 900, the more your chances of availing an approval on your application. Your credit score is decided based on your repayment history, loan history, credit files and others.

Banks and other lending institutions review this number on receiving your application to understand your credit risk. Doing so indicates your likelihood that you may pay all your dues on time. CIBIL score for credit card and loan approval is usually 750 and above. Few lenders may even allow you to avail of a credit card if your score is around 700 but not below. For instance, the minimum CIBIL score for HDFC credit card is 700 and above.

Also, your credit score will impact the loan amount that may be approved and your interest rate. In the case your score is low, the lender might also turn down your loan application.

How is your credit score computed?

As has already been mentioned above, your credit score is the number that ranges between 300 and 900. Small businesses can even have a credit score, which is computed in a range between 0 and 300. Credit scores get computed by the algorithm. This algorithm uses info like your debt amount, payment history, and credit history length. The parameters that are taken into consideration include –

∙       Credit mix

∙       Payment history

∙       Credit utilization

∙       New credit enquiries

∙       Credit duration

What must you know about your credit score in India?

In India, the RBI has licensed 4 information bureaus. They are – 

∙       TransUnion CIBIL (Credit Information Bureau India Limited) – This is one of the initial credit info companies in India, and their credit score ranges anywhere from 300 and 900.

∙       CRIF Highmark – This is a full-service credit info bureau started in 2007. CRIF credit score ranges anywhere between 300 and 900.

∙      Experian – This is a multinational credit reporting company that began in India in the year 2010. The credit score for Experian ranges anywhere from 300 to 850.

∙      Equifax – This credit info company was started in collaboration with Equifax Inc. The US and top financial institutions. The credit score for Equifax range anywhere between 300 and 850.

Financial institutions and banks can enquire with authorized credit bureaus to obtain the abridged credit report for evaluating your application for a loan.

Also Check: Minimum CIBIL score for HDFC credit card

What’s a good credit score?

Distinct credit bureaus use distinct scoring models when computing credit scores, so yours might differ based on which bureau furnishes your report. Basically, credit score ranges include –

800 – 900 Excellent
740 – 799 Very good
670 – 739 Good
580 – 669 Fair
300 – 579 Poor

A credit score over 700 – 750 is usually looked upon as good. However, every lender has its own risk grading parameter. For instance, a lender might consider a credit score of over 700 to be good. However, another lender might prefer a credit score of over 750 to be good. In general, a credit score of between 750 and 800 is considered good in most scenarios.

Why do you require a good credit score?

As lenders and other lending institutions use your credit score to evaluate how worthy you are of credit approvals, it is crucial for you to have a strong credit score. If you hold a higher score, it means that you have demonstrated responsible credit behaviour previously. This might endow potential lenders with more confidence in approving requests for loans and other credit. You may even get other benefits like a lower rate of interest, better repayment terms and conditions and a quicker loan approval procedure.

Distinct lenders might even emphasize distinct aspects of your score, like your income or payment history.

How to review your credit score?

The RBI (Reserve Bank of India) has made it compulsory for all 4 licensed credit info companies to permit you to review your score online. Here’s a stepwise process –

Step no. 1 – Visit the credit rating company’s site, like the CIBIL website or CRIF HighMark site.

Step no. 2 – Login using your credentials or through your info like your name, email address and contact number.

Step no. 3 – Fill up the form with the necessary details involving your UID or PAN number.

Step no. 4 – Once this is done, submit the form.

Step no. 5 – You must then receive a mail on your registered email for verification of your identity.

Step no. 6 – Once verified, you might be asked for more details that might be required, like questions linked with credit cards and loans.

Step no. 7 – Upon completion, your credit report is sent to your registered mail id.

If you want to check your score more than once a year, all 4 credit bureaus may allow you to fetch your first credit report in a year without any charges, post which you must pay to fetch more reports.

How can you ameliorate your credit score?

To make sure that your score stays high and to avoid weak scores, it is necessary for you to know which parameters may impact it. These might involve avoiding parameters like missed or late payments and high CUR (credit utilization ratio) etc.

Mentioned here are a few of the ways to ameliorate your credit score – 

∙       Pay your EMI (equated monthly instalments) and credit card outstanding on time.

∙       Do not use a lot of your credit card limit and keep your CUR under 30 %.

∙       Avoid placing an application for multiple credit cards or loans in a short time span.

∙       Review your credit report at regular intervals so that you are aware of exactly what to anticipate.

∙       Unless it is totally necessary, do not close your previous or old credit cards. This is because older credit cards can assure lenders about your good past credit history if you have been meeting your dues on time.

A credit score is a numerical representation of your behaviour with credit that helps lenders estimate your potential as a borrower to repay credit card dues, debts, or loans, i.e., your credit risk. A higher score can assist you in getting various advantages, like a lower rate of interest. On the contrary, a weak credit score may mean your loan or credit card applications may be rejected.

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