CREDIT SCORE
While applying for any loan or credit card at the bank, the first thing that the bank will check is the customer’s creditworthiness through credit score. A credit score is the measure of the credit worthiness of a customer i.e., in simple words, it checks whether the customer has the ability to repay the borrowed money. Therefore, it is advised to maintain a good credit score.
A credit score is a 3-digit number in the range of 300 to 900. It basically describes the credit merit of a person who has taken a loan or owns a credit card. Authorized lenders in India use the credit score calculated by 4 credit bureaus i.e., CIBIL TransUnion, Experian, Equifax, or CRIF High Mark to grant the loan. A credit score helps in analyzing the credit and repayment history, credit utilization, all the previous debts, and their tenure, etc. Although, in India, banks have their own limit of providing the loan but still if your credit score is above 900 then generally your chances of getting loan approval are higher. The majority of the banks and non-banking financial companies generally consider a credit score of 750 and above as an ideal score for granting a loan.
How credit score is calculated?
Each of the 4 credit bureaus as mentioned above uses its own algorithm for calculating the credit score. There are multiple factors that are considered for computing the credit score like payment history, credit type, and age, credit utilization.
All these factors with their impact level on the credit score and history are explained below:
Payment history: In this factor, your consistency of paying the bills and EMIs is looked at. This factor has a very huge impact on the credit score. Good payment history shows that your loan is at low risk of being a defaulter and you are a responsible borrower. It will help you in getting faster approvals and negotiations in interest rates. Missing the payments or paying late will lower the credit score.
Credit utilization ratio: It is the second biggest factor that has a huge impact on the credit score. It is the ratio of the total credit amount used to the total available cumulative credit limit. It is calculated by dividing the overall outstanding balance of a customer by the total credit limit. To maintain a good score, it is generally advised by experts to use only 30% to 40% of the credit limit.
Credit age: longer history of credits of the customer helps lenders in taking a well-informed decision. Therefore, credit age is also one of the factors that have a considerable amount of impact on the credit score. If you have a long credit history with timely payments then it will make you a responsible borrower as compared to the customer who has a very short credit history.
Total number of accounts: Balancing the secured as well as unsecured credit is very important. A credit card is considered an unsecured credit while a car loan or a home loan is considered a secured credit. A balanced mix of both helps in good credit score, however, it has less impact as compared to other factors. Therefore, it is advised not to take only one type of loan in large quantity.
Ways to Improve the credit score
There are number of ways to improve your credit score. Some of the major ways of those are:
Check your score report regularly: Sometimes it may happen that your credit score goes down despite good payment history. It may occur because of possible errors in the credit report like your loan is cleared but it is still showing in the report. Therefore, it is advised to go through the report regularly and check it for any discrepancies.
Maintaining the older credit cards: Use the older credit cards to make stronger as well as lengthier credit history. A credit card account that is maintained for a longer period will always help in boosting the credit score.
Diversifying the types of credit: To be on the safer side, build a balanced mix of credit with secured and unsecured loans. If you have not borrowed any money till now then you will not have any credit history and it may create an adverse impact on your credit score.
Avoid racking up debts: a large number of loans at a time will put a negative impact on the credit score. Therefore, it is advised to take one loan at a time, clear it, and then take another loan. Overutilizing credit cards should also be avoided. A good utilization ratio is between 30% to 40%.
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