What Actually is a Credit Score?

300 to 900 –These three magical digits are much more than just numbers. They are the most important measures of your creditworthiness. Credit score helps a lender (i.e. bank or nbfc) assess the risks factors in providing loan to you based on your credit history. Every lender has their own criteria depending on what level of risk they find acceptable. Higher credit score = lower risk.

What does a Credit Report consists of?

Your Credit Report includes:

- Names of lenders that have provided you credit (i.e. loans and/or credit cards)

- The credit that you have taken. For example, home loan, personal loan etc.

- Your Payment History

- Number of enquiries – each time you apply for a loan/credit card, the lender checks your credit report and this is listed in your credit report

In India, CIBIL is the most popular credit bureau. It is widely accepted and used by Indian lenders to check the creditworthiness of the loan applicant. There are also other credit bureaus such as Equifax, Experian, CRIF High Mark, etc whose credit reports are used by Indian lenders to determine the 5 C’s of Credit – Credit History, Capacity, Collateral, Capital, Conditions.

Your Credit Score consists of 5 Factors ---

1. Your Payment History also known as Repayment Behavior:

A. Whether you make payments on time

B. How often you miss payments

C. How many days past the due date you pay your EMIs

2. The Amount You Owe:

A. The total number and types of loan accounts that you have

B. How much credit you have available to use

3. Your Credit History: Your history of making timely payments. Having the same loan accounts for a long period of time and making the payments on time will increase your credit score gradually.

4. Your Existing Loan Accounts:

A. Credit Card

B. Consumer Loan

C. Personal Loan

D. Auto Loan

E. Home Loan

F. Business Loan

5. Your Recent Credit Activity:

A. This includes frequency of enquiries done by lenders in recent times, say, in last 1 month or 3 months. Too many enquiries indicate credit-hungriness and can affect your credit score negatively.

B. Frequency of loan accounts opened by you in recent times. Opening of too many loan accounts may indicate financial trouble and can reduce your credit score.

Advantages of a Good Credit Score:

✧ A higher credit score can help you get lower interest rates when you apply for a loan. Just a reduction of 1-2 points in interest rates can make a huge difference.

✧ Business credit can be obtained without requiring personal guarantee.

✧ A good credit score boosts your confidence to get the money you need.

✧ Your credit score/report represents your financial reputation. It is built by your track record of making on-time payments. It represents your credit habits.

✧ You may get low interest rate pre-approved offers from banks & NBFCs.

So build and maintain a good credit history through managing your money carefully by:

- Making payments on time

- Staying within your credit limits

- Using credit cards in a wise manner