Have you owned credit cards and loans and had a history of paying them off on time? Do you wish to seek another loan at a later point in time? However, you may not always know how banks lend you loans or credit cards. They only consider you creditworthy if you have an optimum credit score.
What is a Credit Score?
A credit score measures your ability to pay back a debt you acquired from a financial institution.
A high credit score will entitle you to additional benefits from a bank or NBFC, such as a more significant loan amount, a lower interest rate, and the ability to repay the loan over a longer period.
What Does a Credit Score Range Mean?
In India, a credit score varies from 300 to 900. The higher your credit score, the higher your chances of receiving a loan or a credit card.
Why Should You Try to Improve Your Credit Score?
You should always raise your credit score above 900 because a higher credit score boosts your chances of receiving favourable terms on personal loans and credit cards.
Who Computes Credit Score?
Credit information companies such as CIBIL Score TransUnion, Experian, Equifax Credit Score, and High Mark calculate credit scores. When an individual conducts a transaction that affects their credit score, the banks report the transaction to the credit agencies. The RBI requires this data delivery.
When a bank wants to examine people’s credit scores, it will request their credit report from one of the agencies. When the bureau receives bank information, it begins collecting more details about the individual’s financial habits from other entities. Then, they aggregate this data and create the credit report. A credit report is a financial report card that includes an individual’s credit score.
CIBIL Score Range
The CIBIL score (a three-digit figure) summarises the credit history based on information from the Credit Report, like ‘Enquiries’ and ‘Accounts’. The score ranges between 300 and 900; any late payments and multiple inquiries will lower your CIBIL score.
In a nutshell, the higher the CIBIL score, the simpler it is to obtain a loan or a credit card.
What is the Optimum CBIL Score?
Any score of 750 or more is regarded optimal, and you will be eligible for various credit cards and loans. However, if your credit score is not less than 750, you may have difficulty obtaining a loan from an NBFC or a bank.
|Range of CIBIL Score||What it Means|
|NA/NH||“not applicable” or no history”. For example, absence of credit history if you have never used a credit card or have never taken a loan.|
|350 – 549||A bad CIBIL score. It means you have been late paying credit card bills or EMIs for loans. With a CIBIL score in this range, getting a loan or a credit card will take a lot of work as you risk becoming a defaulter.|
|550 – 649||A fair score. It suggests you need help to pay the dues on time. The interest rates on loans could also be higher.|
|650 – 749||Right score. You can continue displaying good credit behaviour and increase your score further. Lenders will consider your application and offer you a loan. However, you may still need negotiation power to get the best deal on the interest rate for the loan.|
|750 – 900||An excellent CIBIL score suggests you are regular in credit payments and have an impressive payment history. As a result, banks will also offer you loans and credit cards since you have a low risk of becoming a defaulter.|
What Are the Factors That Affect the CIBIL Score?
When calculating the credit score, CIBIL considers
- The credit mix– refers to the many forms of credit accounts you have – mortgages, loans, credit cards, and so on. It is one of the factors you would consider when determining your credit scores. However, the weight varies depending on the credit scoring model (methods of computing credit scores) employed.
- New credits– a new contractual agreement in which a borrower obtains something of value immediately and agrees to pay for it later, usually with interest.
- Tenure– refers to the time someone holds a job permanently.
- Credit use– means the borrowed money to purchase something. You take out a loan (with your credit card or loan). You buy what you desire. You repay the loan with interest later.
- Credit balance– refers to an amount owed to you by the card issuer. When you make a payment, credits apply to your account. You may receive credit when you return something purchased with your credit card.
- Payback history– refers to the amount of time required to recover the cost of an investment or the amount of time needed for an investor to achieve a breakeven point.
Experian Score Range
The Experian score goes from 300 to 850.
Where is the Experian Score Most Commonly Used?
Various lenders, including NBFCs and banks, offer loans and credit cards depending on credit score. Your credit score also influences car loan approval. In addition, a higher Experian credit score means a lower down payment and interest rates.
What is the Optimum Experian Score?
What is a good credit score? You might have this question when you think of borrowing a loan.
In India, a credit score of 800 or higher is considered outstanding. An excellent credit score is greater than 700. A high credit score guarantees confidence in banks and non-bank financial institutions that can repay the loan. The majority of credit ratings fall between 600 and 750.
What Are the Factors That Affect the Experian Score?
Several elements determine credit scores, including
- Negative information– Late payments on loans and credit cards, charge-offs, accounts sent to collection, bankruptcies, delinquent accounts, short sales, deeds instead of foreclosure, and foreclosures are examples of negative information.
- Recent credit applications– refers to a form used by potential borrowers to obtain credit approval from lenders in the most recent period.
- Credit history– refers to the continual documentation of a person’s debt repayment.
- Credit history length– refers to the length or age of your credit history or the age of the accounts on your credit reports.
- Credit utilisation– is the percentage of total credit used, often known as amounts due.
- Payment history– demonstrates how you’ve paid your accounts during the life of your credit.
Some criteria that do not affect your credit score:
- Details not available in the credit report
- Child support payments
- Place of living
- Your income
Why Should I Check My Credit Score?
You must maintain a careful check on your credit score. It is the most accurate approach to assess your prospects of obtaining a line of credit. Another reason to monitor your credit score is to see whether credit bureaus make mistakes when calculating your score so that you can make timely corrections.
Are There Any Effects on My Credit Score if I Inquire About It?
It depends on the nature of the inquiry. There are two kinds of inquiries: harsh and soft. Hard inquiries lower your credit score by some points, whereas soft inquiries do not affect your credit score.
What is a Soft Enquiry and a Hard Enquiry?
An individual makes a soft enquiry. There are also cases when some companies obtain your credit score from Experian and make a soft inquiry on your behalf. As a result, this will not affect your credit score. You can also obtain your free credit score.
When a financial institution reviews your Credit Score to decide on your credit application, the enquiry is a hard inquiry. And because the lending organisation analyses your credit score every time you apply for a loan or a credit card. So your score will drop a few points each time a bank checks it.
Note: Do not simultaneously apply for a loan or credit card to multiple institutions. An excessive number of inquiries will harm your credit score.
What Hurts your Credit Score?
Several variables can impact your credit score:
- Delayed Credit card payments
- Missing loan payments and credit card debts
- Charged-off accounts owing to non-payment of credit card dues
- Transfer of account to collections due to non-payment of credit card dues
- Declaring bankruptcy
- Usage of credit cards to the limit
- Closure of credit card with debt due.
- Closure of outdated credit cards, resulting in a shorter credit history
- Use of multiple credit cards at the same time.
- Credit account homogeneity
- Checking of credit reports on an irregular basis
- Multiple loan applications in a short period
Calculation of Credit Score
Credit bureaus in the country calculate credit scores based on various characteristics such as your credit history, payback behaviour, and credit type, among others.
The country has four credit bureaus: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. They have the authority of the Reserve Bank of India (RBI). Monthly, financial institutions in the country provide your credit information to these bureaus. Each credit bureau has its algorithm and way of computing scores.
Let’s look at the four primary components and how they affect your credit score:
|Payment History (High Impact)||If you cannot pay credit card bills and EMIs on time, there will be an impact on your credit score.|
|Credit Exposure (High Impact)||You should avoid delayed and missed payments, as they get reported and negatively affect your score.|
|Age of the Credit (Medium Impact)||A long credit history works well for your credit score, giving the lender insight into your repayment patterns.|
|Total Types of Account (Low Impact)||It is better to have a good balance of secured and unsecured loans in your credit history.|
Why are Credit Reports Used?
A credit report is a statement that contains details on your credit activity and current credit situation, like loan repayment history and credit account status. Most people have multiple credit reports.
Creditworthiness means how a lender determines how worthy you are to receive new credit. Hence creditworthiness evaluation refers to whether a person bound to obtain credit can repay the same.
A credit report can help financial institutions understand your creditworthiness.
Missed or Late Payments Examination
The report details all your payments, be they late, missed, or already paid. Thoroughly examining the missed or late payments can help officials decide whether you can repay the credit.
Online Credit Score Verification
You can obtain credit reports by visiting the credit score provider’s website. To view your credit report, you must provide the following:
- Personal information such as your name
- PAN card number
- Date of birth
Complete the personal verification process and pay a cost.
Before approving your loan, your lender will examine your credit score online to ensure your ability to repay. When your credit score reaches nearly 900, you have a great chance of obtaining uncomplicated loan approval. A score of less than 300 is deemed low.
Single Platform Analysis of All Credit and Loan Accounts
The report contains details on your credit activity and current credit situation. You can analyse all credit and loan accounts on a single platform.
Reporting of Mistakes on the Report
Identifying an inaccuracy on your credit report allows you to raise it with the credit reporting provider. In writing, you should explain what you believe is incorrect and why and submit copies of documents supporting your claim.
Credit reports facilitate the information necessary for making credit and lending decisions.
Credit reporting systems comprise debtor information databases and the institutional, technological, and regulatory structure that allows such databases to function correctly. The data saved in these systems might be related to persons and corporations.
The Application Process for Obtaining Your Credit Report
Most CICs provide credit reports online and offline. To obtain their credit report, the individual must provide the necessary information and make a payment.
Documents and information needed to receive a credit report online:
- PAN card number
- Date of birth Address
- Identity verification
Documents and information needed to obtain a credit report offline:
- Credit report request form
- Proof of Identity (PoI), such as a PAN card or a driver’s licence
- Demand Draft (DD) for the appropriate fee payable to the relevant CIC
Steps you must follow to receive a credit report offline:
- Visit the CIC’s website to download and complete the credit report request form.
- Self-attested and scanned copy of any Proof of Identities (PoI), such as a PAN card or a driver’s licence.
- Enclose a Demand Draft (DD) for the appropriate fee payable to the relevant CIC.
- Send the documents and the DD to the CIC’s website address.
Some Facts About Credit Scores
Here are ten facts about credit scores.
- Your credit score is unrelated to your income, savings, or investments. Your debt activity and credit history add up into a number that can typically communicate whether or not you are a good debtor.
- Checking your credit score does not affect your score. So, don’t be concerned about your credit score dropping; instead, check it here.
- Although you can see missed payments in your credit score, the score will disclose no information in public forums. Only companies interested in a specific individual will receive the score.
- Your Credit Score gets affected if you close an active or inactive credit card. It may either fall or rise, but the score change is unknown.
- Your credit report cannot be changed or amended. The score will be updated whenever you conduct a financial transaction. Your score will be affected if you close an account, fall behind on payments, make a repayment, or engage in any other activity.
- Credit scores are merely a lender’s first impression of you and are not the only determinant of loan acceptance. To authorise a loan, different institutions and lenders use other screening techniques.
- You cannot obtain a credit score. Credit companies will have access to your credit score if you have a loan account, a credit card, or have applied for a loan.
- Institutions will not consider payments that were late more than three years ago for calculating your credit score. So you need not be concerned about the payments you missed some years ago.
- Taking out too much credit can harm your credit score. Even if you complete your payments on time, having too much credit will damage your credit score.
- Your credit utilisation ratio has an impact on your credit score as well. The closer you get to your card’s maximum limit, the more likely you will damage your score.
When should I inquire about my credit score?
You should review your credit reports at least once a year and ensure that no inaccuracies prevent you from obtaining credit or the best loan terms available. Check that the information in the report is correct and up to date.
Why Your Credit Score Is Important?
Lenders can use your credit score to determine your creditworthiness. Your credit score affects your chances for credit cards, loans, mortgages, and auto loans, as well as the interest rate and terms assigned to you following approval.
When do you need a credit score?
Specifically, credit scores serve as your financial scorecard, measuring your identification in various significant financial scenarios. Banks, credit card firms, and other lending organisations can use it to approve loan or credit card applications.