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All You Need to Know About Credit Scores

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All You Need to Know About Credit Scores

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Ask anyone about borrowing money from a bank or NBFC, and the first question they will ask you is, “What is your credit score?”. Any lending institution looks at this information before even considering your eligibility to the next steps. Consider this score as the gateway to obtaining finances for your needs. Let's look at it in detail.

What is a Credit Score?

Credit Score Meaning: A credit score predicts the likelihood of a given individual to pay back their loan within the stipulated time frame. It is calculated with the aid of a scoring model that employs a mathematical formula that uses information listed under an individual’s credit report. 

Credit bureaus are responsible for calculating credit scores, and they do so by taking into account your credit inquiries, records of repayment, and credit history. Credit scores come in handy at the time of applying for a loan or a credit card. Should you avail either of these products from a non-banking finance company, a higher credit score may provide you with additional perks. These include a lower interest rate, a greater amount that’s been loaned, and a repayment tenure that suits you best.

Understanding Credit Score Ranges

In India, credit scores range between 300 and 900. As a general rule of thumb, you should strive to acquire a credit score of 900 if not close to it. This is because a high credit score optimizes your chances of getting a viable deal on credit cards as well as personal loans. 

Interpreting CIBIL Scores 

Credit Information Bureau (India) Limited (or CIBIL) scores provide an overview of a person’s credit history based on a number of details. These include ‘account history’, ‘public records’, ‘credit summary’ and ‘credit enquiries’ that are found in their credit report. Those who secure a higher CIBIL score have an easier time procuring a loan and/ or credit card. In the event that credit card or loan payments are made later than the outlined date, CIBIL scores can decline. 

Below we’ve outlined the breakdown of the CIBIL credit score range that you should know.

NA/ NH – Each of these acronyms is indicative of “not applicable” and “no history”, respectively. An individual is most likely to get this if they haven’t previously used a credit card or taken out a loan owing to which they don’t have a credit history.

350-549 – A CIBIL credit score within this range isn’t viewed in a good light and is considered to be bad. It is indicative of your having paid your credit card or EMI bills later than the stipulated date. Should you have such a rating, it will be hard to procure a loan or a credit card as you will be at high risk of becoming a defaulter. 

550-659 – This CIBIL credit score is considered fair. It is indicative of your having struggled to pay your dues in time. With this score, you are likely to be able to avail of a loan, but the interest rates charged could be higher than if your credit score was superior.

650-749 – This CIBIL credit score is good, and it indicates that you are following good credit behaviour. Your effort is likely to be appreciated and may increase your score some more. Lenders will take into account any credit applications you make and will offer you a loan. However, the interest rate applicable to these loans may be at the lender’s discretion and not the borrowers.

750-900 – This is a perfect CIBIL score. It is indicative of regular credit payments along with an impressive payment history. Should you have this score, you will be offered loans as well as credit cards by banks as they will view you as the least likely to default on a loan.

CIBIL takes into account the following factors when computing credit scores:

  • Credit balance
  • Repayment history
  • Credit mix
  • Credit utilisation
  • Tenure
  • New credits 

Computing Credit Scores

Each time you make transactions that are relevant to your credit score determination, your bank will send details relating to the same to the four credit bureaus operating in the country. This is a mandatory requirement that’s been stipulated by the Reserve Bank of India. It is the norm for banks to keep credit information companies informed about your spending habits.

In case a bank then needs to check your credit score online, they can reach out to any one of the four bureaus. Each of these bureaus maintains the same credit score for each individual, so it doesn’t matter what bureau a bank selects.

Once this information has been received by a bank, credit bureaus will collect more information relating to your financial habit from different financial institutions and banks. This information will then be formulated by credit bureaus to create a credit report.

Checking Your Credit Score

It is good to keep tabs on your credit score and your credit card score range as it can help you determine what your chances of getting a line of credit is. It is also important to be aware of this score to know if it declines or if an error has been made at the time of its calculation. This can help you make the necessary amendments with time. 

Enquiries about your credit score

The kind of enquiry made about a credit score can impact it. Credit score enquiries take on the following forms.

Hard Enquiries

These inquiries are made by financial institutions who check your credit scores to determine how to proceed with your credit application. Each time you apply for a credit card or loan, the lending institution will check your score, which in turn can cause it to dip by a few points. 

Soft Enquiries

Should you, as an individual, make an inquiry, it is classified as a soft inquiry. This does not impact your credit score. 

Factors That Adversely Affect Credit Scores

Credit scores are adversely affected by the following factors that can cause them to dip:

  • Making late credit card payments
  • Repeated late credit card payments can result in your account being charged off, which is one of the worst things that can happen 
  • Not responding to the overdue credit card or loan bills
  • In case your lender calls in third-party debt collectors to retrieve the money originally loaned to you due to a lack of repayment on your part, this will reflect poorly on your credit score
  • Filing for bankruptcy can adversely affect a credit score
  • Your credit limit will fall to Rs 0 if you close a card with an outstanding balance which is the equivalent of a maxed-out credit card 
  • If you close an old credit card, your credit history reduces, which negatively impacts your credit score
  • Applying for several credit cards and loans within a small time frame can cause credit scores to decline
  • Having only one kind of credit account can adversely impact your credit score
  • Failure to check credit card reports and report any errors can hurt your credit score

Final Thoughts

By using a line of credit that’s been extended to you in the form of a credit card or loan, it is possible to fulfil financial goals that you otherwise may not be able to take on. That said, availing of this line of credit requires you to have a good credit score. Make sure that you plan out and do your own research thoroughly before you take a loan, as repaying the amount is a long-term commitment.

Frequently Asked Questions 

1. How do I check my credit score? 

If you are wondering, “what is my credit score?” you can make a soft inquiry with your bank, which won’t impact your credit score. On the other hand, you can make a hard inquiry wherein a financial institution checks your credit score. This will negatively impact your credit score by a few points.

2. What is a good credit score?

A credit score ranging between 650-749 is good, while a credit score ranging between 750 and 900 is excellent. The latter entitles you to loans as well as credit cards from banks that will view you as the least likely to default on a loan.

3. Is the credit score and CIBIL score the same?

There exist 4 credit bureaus in India. They are TransUnion CIBIL, CRIF Highmark, Equifax, and Experian. CIBIL happens to be one of the 4 credit bureaus that give a credit score. That said, the credit score of a person will remain the same regardless of which credit bureau draws up the information. 

4. Who calculates credit scores?

Credit bureaus are responsible for calculating credit scores with the aid of a scoring model. This model employs a mathematical formula that uses information listed under an individual’s credit report.

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