A person’s credit score is a number that banks and other lending institutions use to ascertain their “creditworthiness.” This number is usually between 300-900, and it depicts the individual’s ability to repay borrowed credit, like loans.
In India, there are four credit information bureaus licensed by the RBI that calculate this credit score – TransUnion CIBIL, Experian, CRIF High Mark, and Equifax.
While different credit bureaus might use different scoring models, in general, it is accepted that a credit score above 700-750 is generally considered good.
Common credit score ranges are as follows:
|
Credit Score |
Range |
How did you get this score? |
|
NA/NH |
“Not Applicable” or “No History” |
You likely do not use a credit card, and/or have never taken a loan. Thus, you will not have a credit history. |
|
300-549 |
Poor |
You might have a history of irregular repayments or defaults on credit card bills or EMIs. Or, you might have applied for a lot of credit in the past and have displayed poor credit utilisation, You will be considered at a high risk of defaulting on your loans, Lenders might not approve your loans or credit applications. |
|
550-649 |
Fair |
You may have shown some irregularities with your past payments, such as late payment of credit card bills/EMIs or multiple credit inquiries, You might still be considered a risk for lenders, Many lenders may not approve your loans, and those who do will likely have higher interest rates. |
|
650-749 |
Good |
You have displayed good repayment behaviour in the past, You will be considered at a lower risk of defaulting, Most lenders will consider your credit and loan. applications, but you might not get the best deals on the rate of interest. |
|
750-799 |
Very Good |
You have been regular with credit payments, and longer credit history, and have displayed responsible repayment behaviour, You might be considered a low risk for lenders, Lenders will not be wary of extending credit, and you will get good deals on your loans. |
|
800-900 |
Excellent |
You have displayed excellent financial management, been regular with your credit payments, and have an exemplary credit history, Banks and lending institutions will consider you a low risk of turning into a defaulter, and will offer you better deals on loans and credit cards |
Banks and other financial institutions use credit scores to determine a person’s “creditworthiness.” This just looks at their ability to repay borrowed credit, such as a loan. These lenders use a person’s score to decide whether they will approve their applications for a loan or credit card, and to avoid situations of bad debt or fraud.
Since every lending institution has their own risk grading, it is important to have a high (or good) credit score. For example, one bank may consider a score above 700 to be good, while another bank may prefer a score above 750.
Different lenders may also place more emphasis on different aspects of your credit score, such as your credit utilization, or your payment history. Thus, in general, a score above 750-800 should be considered good in most situations.
When you have a higher credit score, it means that you have demonstrated good credit behavior in the past. This means that potential lenders might have more confidence in approving your credit requests. You might also be able to get other benefits, such as lower interest rates, better terms of repayment, and a quicker loan approval process.
Thus, having a good or high credit score can help you get your credit applications approved, while a bad or low credit score can contribute to your loan and credit card applications being rejected.
There are a number of factors that are used by an algorithm to calculate a person’s credit score. Each of these factors has a different weightage on the score, though this changes based on the company calculating the score.
These factors include:
|
Factors |
What affects these factors? |
|
Payment History |
This refers to the timely payments of credit card bills, loans, and EMIs, Having delayed, missed, or defaulted payments will lower your credit score. |
|
Credit Utilization |
This refers to the amount of your credit limit that you use, Ideal spending is no more than 30% of your credit limit. If it is higher than this, it will bring your score down. |
|
Credit Duration |
This refers to the length of your credit history, or how long you have had a credit account, Older accounts and credit cards can show potential lenders that you have consistently been paying your bills on time |
|
Credit Mix |
This refers to the types of credit you have, There are two main types of credit: unsecured loans (like credit cards and personal loans) and secured loans (such as auto loans or home loans). It is recommended to have a mix of both. |
|
Credit Enquiries |
This refers to the number of times you have applied for credit, such as credit cards, loans, etc, A higher number of enquiries, especially during a short period of time, can lower your score. |
Once you know about the factors that affect your credit score, it can be easy to know what you can do to ensure that you have a good credit score. While it may take time and effort to improve your credit score, developing the following responsible habits now can help you in the long run:
While there are many factors that affect a person’s credit score, there are also a number of factors which play no significant role in calculating a credit score. These include:
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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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