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A credit score is a number that is determined by lenders and financial institutions. It is meant to show a person's “creditworthiness” or their ability to repay a debt, loan, or mortgage.
In India, there are four credit bureaus that prepare this credit score – TransUnion CIBIL, Experian, CRIF Highmark, and Equifax.
A person’s credit score is usually expressed as a three-digit number between 300-900 (with 900 being the highest score possible) based on their individual history of repayment, credit files, loan history and more.
Banks and other lending institutions will check this number when you apply for a loan to determine your credit risk. This refers to the likelihood that you will pay your bills on time and can decide whether or not you will be approved for a loan.
Your credit score will also affect the loan amounts that might be approved, as well as the interest rate for the same. In case your credit score is very low, the lender may even reject your loan application.
As we have already mentioned, an individual’s credit score is a number between 300-900 (with 900 being the highest score possible). Small businesses can also have credit scores, and these are calculated on a range from 0 to 300.
Credit scores are calculated by an algorithm. This uses information such as your payment history, the amount of your debt, and the length of your credit history. The factors that are taken into account include:
In India, the Reserve Bank of India (RBI) has licensed four credit information companies:
Banks and financial institutions can enquire with these authorized credit bureaus and obtain an abridged credit report of you or your business’s credit history when evaluating your loan application.
Different credit bureaus use different scoring models while calculating credit scores, so yours may vary based on which credit bureau furnishes your credit report. In general, credit score ranges are as follows:
|
300-579 |
Poor |
|
580-669 |
Fair |
|
670-739 |
Good |
|
740-799 |
Very good |
|
800-850 |
Excellent |
A credit score above 700-750 is generally considered good.
However, every lending institution has their own risk grading. For example, one bank may consider a score above 700 to be good, while another bank may prefer a score above 750. In general, a score of 750 to 800 should be considered good in most situations.
Since banks and other lending institutions use your credit score to assess how worthy you are of credit approvals, it is important to have a good credit score.
If you have a higher credit score, it means that you have demonstrated responsible credit behaviour in the past. This may help potential lenders have more confidence in approving requests for loans and other credit. You might also get other benefits, such as lower interest rates, better terms of repayment, and a quicker loan approval process.
Different lenders may also emphasise different aspects of your credit score, such as your income or your payment history.
The Reserve Bank of India has made it mandatory for all four licensed credit information companies to allow you to check your credit score online and for them to provide one free credit score report each year.
Here is how you can check it for free:
If you wish to check your credit score more than once a year, certain credit bureaus will let you do so with paid monthly reports. Additionally, a good time to check your credit score before applying for a loan or for a credit card.
To ensure that your credit score remains high and avoid weak scores, it is important to know which factors can affect it. These may include avoiding things like late or missed payments and high credit utilization (or using too much of your credit card limit).
Here are some ways to improve your credit score:
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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