Credit score is a three-digit numerical representation of an individual’s creditworthiness. It is based on an individual’s credit history, repayment behavior, and credit utilization.
In this article, we will see the popular scoring agencies, calculation weightages, scoring ranges & interpretation, advantages of having higher score and disadvantages of lower score.
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Why a good Credit score is important for me
Credit score is essential because it helps lenders and financial institutions evaluate an individual’s creditworthiness before granting a loan or credit facility. A high score signifies that an individual is financially responsible and more likely to repay their loans on time. Hence, are more likely to get approved for loans, credit cards, and other financial products with better interest rates and terms.
Credit scoring agencies in India
In India, there are four major credit bureaus that provide credit scores based on an individual’s credit history and repayment behavior. These are:
- Credit Information Bureau (India) Limited (CIBIL)
- Equifax Credit Information Services Private Limited
- Experian Credit Information Company of India Private Limited
- CRIF High Mark Credit Information Services Private Limited
Reserve Bank of India (RBI) regulates all four credit bureaus. These are considered trusted sources for credit scores and credit reports. Mostly, the
Out of all, CIBIL is the oldest and most well-known credit bureau in India.
We will now see how CIBIL calculates the score for the individuals.
CIBIL considers the following Factor weightages in scoring
CIBIL uses various factors, and each factor has a different weightage in the overall score calculation.
Here are the weightages assigned to each factor in the CIBIL score calculation:
1. Credit payment history – 35% weightage: Your payment history, including whether you have made timely payments on your credit accounts or have any defaults or late payments, has the highest weightage in the CIBIL score calculation.
2. Credit utilization – 30% weightage: Your credit utilization, which is the amount of credit you have used compared to the credit you have available, has the second-highest weightage in the CIBIL score calculation.
3. Credit history length – 15% weightage: The length of your credit history, or the time since you opened your first credit account, also has a significant impact on your CIBIL score.
4. Credit mix – 10% weightage: The types of credit accounts you have, such as credit cards, loans, or mortgages, can also impact your CIBIL score.
5. Recent credit behavior – 10% weightage: Recent credit inquiries, applications for new credit accounts, and new credit accounts opened can also impact your CIBIL score.
What are Score ranges in CIBIL
750 and above: A CIBIL score of 750 and above is considered to be an excellent score. Individuals with this score are likely to be approved for credit at attractive interest rates and terms.
700 to 749: A CIBIL score within this range is considered to be a good score. Individuals with this score are likely to be approved for credit at competitive interest rates and terms.
650 to 699: A CIBIL score within this range is considered to be a fair score. Individuals with this score may face some difficulty in getting approved for credit and may be offered credit at slightly higher interest rates.
600 to 649: A CIBIL score within this range is considered to be a poor score. Individuals with this score may face significant difficulty in getting approved for credit and may be offered credit at higher interest rates and less favorable terms.
300 to 599: A CIBIL score within this range is considered to be a very poor score. Individuals with this score may find it extremely difficult to get approved for credit and may have to pay very high interest rates and other fees if they do get approved.
You can check your credit score here.
How do I improve my credit score
1. Pay your bills on time: Late payments can significantly impact your score, so make sure to pay your bills on time.
2. Keep your credit utilization low: Avoid maxing out your credit cards, as high utilization can negatively impact your score.
3. Maintain a healthy credit mix: A healthy mix of secured and unsecured credit can help improve your score.
4. Check your credit report regularly: Errors or inaccuracies on your report can lower your score, so it’s essential to check it regularly and correct any mistakes.
5. Limit new credit applications: Applying for too much credit in a short period can hurt your score, so be mindful of the number of credit applications you submit.
By following these tips and maintaining a good history, you can improve your score and increase your chances of getting favorable terms and conditions.
Advantages of my high credit score
1. Access to better credit facilities: You may be eligible for a wider range of credit facilities, including loans, credit cards, and mortgages, with better interest rates and favorable terms.
2. Easier approval: Lenders and financial institutions are more likely to approve applications from individuals with a high score, as it demonstrates their ability to manage credit responsibly.
3. Negotiating power: You may have more bargaining power when negotiating loan or credit terms with lenders.
4. Lower insurance premiums: Insurance providers may offer lower premiums to individuals with a high score, as they are seen as less of a financial risk.
What if I have lower credit score
1. Difficulty obtaining credit: Lenders and financial institutions may be hesitant to approve credit applications from individuals with a low score, as they are seen as a higher risk.
2. Higher interest rates: If you are approved for credit with a low score, you may have to pay higher interest rates and fees, as lenders will view you as a higher risk.
3. Limited credit facilities: You may have limited access to credit facilities with a low score, making it difficult to obtain loans, credit cards, or other financial products.
4. Difficulty renting an apartment: Landlords may check your score when you apply to rent an apartment, and a low score may make it difficult to secure a lease.
Also read: Public Provident Fund
