A credit score is an important indication of one’s financial status. While frequently used by banks and creditors to assess loan applicants, it is surprisingly overlooked by consumers like you. Understanding what constitutes a good credit score is like cracking the code of financial success.
It's more than just a number; it can lead to improved interest rates, loan approvals, and other benefits. So, take a cup of coffee and let's discuss the intricacies of a good credit score in India!
What is a Credit Score?
In simple terms, a credit score is a number that denotes your creditworthiness. It is derived by analysing your credit history. It is an essential factor in deciding whether you can get a loan or not.
CIBIL, a TransUnion subsidiary recognised by the RBI, analyses credit ratings for people and companies using data from banks and lending institutions. Therefore, credit scores are also known as CIBIL scores. The full form of the CIBIL score is Credit Information Bureau India Limited.
A good CIBIL score allows for simple access to credit products such as loans and credit cards. On the other side, a low CIBIL score may make it difficult to acquire credit when necessary. Moreover, a good credit score helps you in getting loans quickly and at a low-interest rate.
Credit Information Company (CIC) has changed its rating standards for borrowers and cardholders. One noteworthy difference is that CIBIL now calculates ratings based on the latest 36 months of your credit history rather than simply the previous 24 months.
In addition, if you have less than six months of credit history, you can obtain ratings under the new methodology, which is counter to previous practice. The goal of upgrading this scoring system is to allow lenders to study borrowers' behaviour over time and gain a better understanding of their credit patterns.
How is Credit Score Calculated?
A credit score is broadly determined on the basis of the 3 C’s of credit: character, capacity and capital. Your history of debts in terms of their amount, tenure, frequency and repayment pattern predicts your character in terms of handling financial obligations.
Your capacity for taking a new loan is mainly determined by your income over the last couple of years, other loans being serviced and how many credit accounts you have. The capital or assets available to you, like a car, real estate, and other investments, serve as collateral against a loan.
Apart from the factors mentioned above, many other metrics give an insight into your financial discipline, and they all influence your score.
What is a Good Credit Score?
Credit Score Ranges
let us have a look at an indicative credit rang that credit Information Companies or credit bureaus consider while evaluating your new crdit applications for loans and credit cards:
| Credit Score | Status | What doeseit means? |
| 800 and above | Excellent | low-risk borrowers, easier to secure a loan at preferntial terms |
| 750 to 799 | Good | Good credit history, easy to get the credit application approved |
| 601 to 700 | Low | 'Subprime' borrowers, difficult to qualify for new credit because of high risk of default |
| 300 to 599 | Poor | High chances of credit rejection if applying at this score, focus on rebuilding the credit score |
While your CIBIL score can be between 300 and 900. However, very few loans get approved for individuals with a credit score of less than 700 (Know more about CIBIL score and your loan eligibility).
As per the credit bureau, 79% of loans are approved for individuals with a score greater than 750. If you do not have a credit history or have had no credit activity in the past couple of years, you may also get a rating of ‘NA’ or ‘NH’. This does not necessarily imply a bad score.
Paying your dues on time is the most obvious way of maintaining a good CIBIL score when getting a loan. Be diligent and ensure you do not miss repayment dates.
Some other ways that can help improve your score are by not taking too many loans, not having more than the required credit accounts, and monitoring all your accounts, including the ones that you jointly hold.
Why is CIBIL Score Important?
As mentioned earlier, a strong credit score is quite crucial. Banks and other financial organisations use it to determine your "creditworthiness," or the likelihood of repaying borrowed credit, such as a loan. They use this score to assess whether to accept your loan or credit card applications, as well as to prevent bad debt or fraud.
Different lenders use different risk-grading methods, so having a high (or decent) credit score is essential for getting a loan. For example, one bank may consider anything over 700 to be okay, whilst another favours scores above 750.
These ratings are influenced by a variety of factors, including your payment history and credit utilisation. In general, most scenarios would consider anything above 750-800 to be quite a good CIBIL score for a loan.
Having the best CIBIL score effectively implies that you've been responsible with borrowing in the past. Potential lenders take note of that! Suppose you have a strong track record of borrowing money. In that case, you may be eligible for additional benefits such as reduced interest rates and faster loan approval processes in the future.
So, having a healthy CIBIL score is really beneficial when it comes to making fresh financing requests! However, a low credit rating may hinder future borrowing opportunities.
What are the Factors That Affect Your Credit Score?
Here's a rundown of the significant elements that might influence your credit score:
- Mistakes in Your Credit Report: Any inaccuracies, such as incorrect defaults or personal information, might lower your credit score. Keeping an eye on your report and swiftly resolving any errors through a dispute is essential.
- Repayment Track Record: Paying off bills and EMIs on schedule demonstrates prudent credit management, which benefits your credit score. On the other hand, falling behind or badly paying bills has a negative impact on your credit management capacity.
- Credit History Length: A long history of responsible borrowing practices indicates financial stability and credit management - all of which are beneficial to improving your score.
- Loan Inquiries/Applications: Applying for many loans at once shows a frantic need for funds, which does not bode well for the review process. It also leads to many complex queries, which lowers your score.
- Credit Diversity: Balancing secured and unsecured credit displays excellent handling of different loan kinds and lenders!
- Credit Utilisation Ratio: This shows how much you're consuming relative to what's available. High ratios indicate a greater reliance on debt, with probable repayment difficulties ahead - not good news for getting points! Lower ratios suggest greater money management ability.
How to Improve Your Credit Score Gradually?
Maintaining a good credit score is vital for your financial well-being. Let's look at some crucial factors to keep in mind:
- Limit Credit Usage: It's wise to aim for a credit card utilisation of less than 30%. This shows you're not overly reliant on credit and can help boost your score over time.
- Avoid Multiple Applications: Applying for multiple credits can negatively impact your score due to hard inquiries. So it’s best to minimise the number of applications.
- Consistent Repayments: A stellar payment history accounts for about 35% of your overall score – making timely repayments is crucial!
- Diversification of Credit Profile: A mix of different types of credits (like secured and unsecured loans) reflects positively on your report and assists in maintaining a solid score.
- Maintenance of Active Credit History: A lengthy track record offers insights into responsible borrowing behaviour, which is essential when seeking credit approvals in the future.
- Pay More Than Minimum Due: Avoid carrying forward balances by paying off more than just the minimum amount due each month - this will reflect positively on repayments.
- Carefully Consider Closing Old Cards: Closing old cards could affect the length of your credit history, impacting your overall score. Consider this decision carefully!
FAQs
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What is a bad credit score range?
A score ranging from 300 to 549 is considered terrible credit. Ratings below 550 are expected to be rejected when applying for credit cards or loans. So, if your score falls somewhere between 300 and 549, you must endeavour to improve it.
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What is a fair credit score range?
Credit scores ranging from 620 to 679 are considered fair. Lenders perceive this number to be less hazardous, making credit approval more likely.
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Can I get a loan or credit card with a credit score of 500?
This credit score is considered bad, making it difficult to obtain acceptance for a loan or credit card. It indicates that you have some unfavourable concerns that need to be addressed immediately. You may enhance your credit score by resolving prior loan or credit card concerns.
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Who calculates my credit score?
The credit bureaus determine your credit score based on the credit actions reported by your lender. Credit scores in India are generated by credit bureaus such as Equifax, CIBIL™, Experian™, and CRIF High MarkTM.
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Does checking my credit score frequently hurt it?
No, you can check your credit score as many times as you want. It has no negative impact on your score.
