A credit score is a standard scale (range from 300 to 900) used by the bank and financial institutions to measure your creditworthiness before lending you money. In simple terms, credit score shows your ability to pay back in the given period. It helps to ensure the bank that you are likely to pay the loan back.
In India, this procedure is carried out by four agencies. TransUnion CIBIL, Equifax, Experian and Highmark. This is where all the banks share the creditworthiness of all their customers. So the database of these agencies is kept updating every time you pay EMIs, credit card bills etc. CIBIL is the most used in India compared to others. These agencies only track loans from the formal sectors.
Benefits Of Having A Higher Credit Score
A credit score is valued between 300-900. the more you are to 900 then The higher the score. That means the higher the chance you getting cheaper loans.
If the credit score range from 300 to 599, it will be extremely difficult to get loans.
If it is somewhere between 600 to 749, the score isn’t great but the lenders will consider other factors like salary and loans into account.
Score is above 750 your loan request will be most likely to be approved and your application process will be faster.
How it is Calculated?
TransUnion CIBIL, Equifax, Experian and Highmark all these four follow a slightly different approach in the calculations of credit score.
- Credit History counts 30% of your score. This is the monthly record of the last three years. Where your EMI, home loans, car loans are tracked. If the payments are punctual then the credit history will give you a good score. But delays and default scan hurt the credit history.
- Credit Utilization counts 25% of the score. Credit utilization is the ratio of your outstanding credit card balances to your credit card limits. It measures the amount of available credit you are using.
- Credit Mix And Duration counts 25% of score- a customer may hold different types of credits such as education loan, mortgage, credit card, and vehicle loans. This cluster of credits is called the credit mix. The good the way the customer handle these, it impacts positively on the credit score.
- Number Of Hard Inquires counts 20% -When a credit card issuer or lender pulls your credit report from one of the three main credit bureaus this is called a hard inquiry.— a hard inquiry can ding your credit score a few points, regardless if you end up being approved or denied for the credit card or loan.
How To Raise Credit Score
- Pay EMI, loans on time. These may take at least 6-8 months to reflect in your credit score.
- Check for errors in your credit score report- sometimes the problems related to due and delaying are with the lender’s side, not the individuals.
- Make sure your closed loans are closed.
- Avoid accepting settlements on your loan even in the case the amount reduce significantly. The banks will report this to the credit agency which adversely affects your score in future
- Keep away from being the guarantor to friends or family who tend to habitually make late payments on their loans.
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