What is a credit score?

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:

• Payment history 
• Credit utilization
• Credit duration
• New credit enquiries
• Credit mix

In India, the Reserve Bank of India (RBI) has licensed four credit information companies:

• TransUnion Credit Information Bureau (India) Limited (CIBIL) – this is one of the first credit information companies in India and their credit score ranges (or CIBIL score as it is popularly known) between 300 and 900.
• CRIF Highmark – this full-service credit information bureau was founded in 2007. CRIF credit scores range between 300 to 900.
• Experian – this multinational credit reporting company started in India in 2010. Credit scores for Experian range between 300 and 850.
• Equifax – this credit information company is a joint venture with Equifax Inc. USA and leading financial institutions in India. The credit score for Equifax ranges between 300 and 850.

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.

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:

• Step 1: Go to the credit rating company’s website, such as the CIBIL website, or the CRIF Highmark website
• Step 2: Login using your login credentials, or create an account using your information (such as your name, contact number, and email address)
• Step 3: Fill out the provided form with your details, including your PAN number or UID
• Step 4: Once this has been completed, submit the form
• Step 5: You should then receive an email to your registered email-id so that your identity can be verified
• Step 6: Once verified, you may be asked for additional information that may be required, such as questions about your loans and credit cards.
• Step 7: After this is completed, your credit report will be delivered to your registered email-id.

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:

• Pay your equated monthly instalments (EMIs) and credit card dues on time.
• Do not use too much of your credit card limit, and keep your Credit Utilization Ratio (CUR) within 30 percent.
• Avoid applying for multiple loans or credit cards within a short period of time.
• Review your credit report regularly so that you know exactly what to expect.
• Unless it is absolutely necessary, do not cancel your old credit cards, as older cards can assure lenders that you have been paying your bills on time.