Kiara, a marketing manager, was surprised to find that her home loan application had been rejected because of a low credit score. When she researched further, she found a lot of mistakes and unwarranted enquiries in the past that had pulled her credit score down. Kiara is not alone in this journey. Many of us find out the existence of credit score when we apply for that first loan or a credit card.
So what is a credit score?
A credit score is a three-digit numerical representation of your creditworthiness that ranges from 300 to 900. It is like a mark sheet, that tells us of the performance of your past credit behaviour. The lenders refer to your credit score before approving your credit application. A good credit is certainly a winner in every loan or credit application. Any credit score of 750 and above is considered a good credit score.
Credit Information Bureau of India Limited (CIBIL) is the most used credit rating agency in India. Most banks and lenders in India have the credit score downloaded from CIBIL.com to arrive at a decision to grant you a loan or not. But CIBIL is not the only credit rating agency in India. Equifax, Experian Credit Information Company and CRIF High Mark are the three other credit bureaus that calculate your credit worthiness. Today we are also seeing some of the new personal lending platforms building their own proprietary credit score based on a lot of behavioural aspects.
How Does CIBIL Compute Your Credit Score?
Your final CIBIL score is calculated based on several factors. These are:
- Your repayment history – contributes to 35% of the score
– Your overall repayment history depends on how successfully you have managed to repay all your debt.
- Your credit balance and utilisation – contributes to 30% of the score– This section refers to the total credit available to you and how much you have already used. Your credit utilisation ratio is an important part here and is calculated as the outstanding balance on your loans or credit cards. If you have used most of the credit sanctioned to you or available to you, you will be considered a risky borrower.
- Your duration of availing credit – contributes to up to 15% of the score
– This refers to the repayment duration and timely repayment within this duration. If you have borrowed credit over a long repayment tenor and have responsibly and successfully repaid it, your score will be positively affected and vice versa.
- Your new credits – contributes to up to 15% of the score– Every time you inquire about credit your credit score is impacted. This may refer to loans you plan to take or credit cards you want to sign up for. If you have made too many credit inquiries, it makes you seem credit-hungry in the eyes of lenders and affects your score negatively.
- Your credit mix – contributes to up to 10% of the score
– It is always important to have a healthy mix of credit, which refers to secured and unsecured loans as well as short-term and long-term credit. So, if you have a home loan, a credit card, and a collateral-free personal loan, you will be deemed to have a healthy credit mix.
Good Credit Score Range
A credit score ranging from 750 to 900 is considered an excellent credit score. The banks, NBFCs, and other online lenders prefer your application for credit if you have such a credit score. The following will help you understand the range of credit score and their meaning.
|Credit Score Range||Grade||What it means|
|750 – 900||Excellent||Eligible for low interest rates and higher approval chances|
|700 – 749||Good||Can become eligible for better interest rates|
|650 – 699||Fair||The options are limited, but credit approval is possible.|
|600 – 649||Doubtful||Higher interest rates on loans and credit card approval could be harder|
|Below 600||Immediate Action Required||Approval chances are very low|
Benefits of a Good Credit Score
Having a prudent approach on all your repayments can absolutely get you a good credit score which in turn will bring numerous benefits. Following are some of the major benefits that a person with a good credit health can enjoy during the lifetime:
1. Low Interest Rates on Loans
This is a major benefit when it comes to having a good credit score. Getting a low interest rate loan can help you pay off the loan much faster. It reduces a significant financial burden and helps you enjoy a happy life. Even a slight reduction in big-ticket loans such as a home loan, loan against property, etc., can save you a lot of money in the long run.
2. Higher Approval Chances for Loans and Credit Card
Every lender pulls out your credit report and checks your credit score when you apply for a loan or credit card. This is called a hard enquiry which will have a slight impact on your credit score. The impact can be all the more negative when the application gets rejected. But with a good credit score, the credit approval chances are higher as the lender will not have a reason to reject your application.
3. Get Higher Limits
Your income and good credit score are the two major determinants of your loan or credit card approval. Moreover, they can get you a higher loan amount or higher credit limit on cards. The lender assumes you a worthy and responsible borrower. With a low credit score, you may get approved for a loan or card, but the rates may be higher, and the amount may be lower.
How can I maintain a Good Credit Score?
Getting a good credit score is possible only if you follow a responsible credit behaviour. Following are some of the factors that are important to maintain a good credit score:
Consistent Repayment: If you want to maintain a good credit score all the time, your repayment record should be clean with 100% positive repayment. Never miss a single repayment in order to enjoy a robust credit health. Making repayment on time is the only assurance that you give the lender about your loyalty towards the credit.
Low Credit Card Utilisation: We recommend keeping your credit card utilisation ratio below 30% as it will help you gain a good credit score over a period. It is a sign to the lenders that you are not credit hungry. Things like maxing out credit card limit or defaults on the bill payment can make it harder to maintain a good credit score. Use your credit card only when it is essential or during emergencies when you have no money. Limiting credit card usage can help you avoid debts and gain a good credit score.
Diversification of Credit: When it comes to loans there are two types of loans, secured and unsecured. If you take too many unsecured loans, banks tend to see it as a negative and might be inclined towards declining your loans. What you can do is to take both unsecured loans like personal loans and secured loans like a car or home loan. P.S Credit cards also count as unsecured credit.
Keep the borrowing to a minimum: If you are applying for too many loans or are always near the limit of your credit card then your score is likely to come down since such activities display a credit-hungry behaviour. The best thing to do is not to take a loan unless absolutely necessary and make sure you don’t come close to your credit limits on the cards.
Avoiding Multiple Credit Applications: When you are desperate for a loan or credit card, you may tend to apply with multiple lenders just to get approved. But, you should remember that it can work against you. Each time you apply for a credit, a hard enquiry is raised by the lender. Each hard enquiry will have a slight impact on your credit score. Multiple hard enquiries will impact your credit score negatively. Moreover, a rejection on a credit application can put you in a tight spot as it may be a hindrance to getting approved from other lenders. Hence avoid applying for multiple credits in order to maintain a good credit score.
After Kiara understood what a credit score is, she worked on removing discrepancies in her credit score by following practices like repaying her EMIs and credit card bills on time, planning her expenses and budgeting accordingly, and borrowing smartly, and it improved her score tremendously. She managed to get a home loan and is all geared up to move into her new house.
Do you know your credit score?
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