What is credit score and its importance?

When we talk about credit or loans, an individual credit score matters the most. A credit score helps the lenders to decide the credibility of the borrower. Therefore, if you are planning to take a loan, make sure your credit score is ideal. If you are new to these terminologies, don’t worry. Today’s article is for the beginners. It will help you get basic understanding about credit score and its importance.

So, let’s get started!

What is credit score?

Your credit score is a 3-digit number which ranges between 300 to 900. The score is calculated and issued by various credit bureaus in the country. A lender usually takes your credit score and credit report into consideration when you apply for a loan.

Every credit bureau uses its own algorithm to calculate the credit score. But the factors contributing to the score remain the same. These factors include:

• Payment History
• Credit Utilization
• Number of Credit Enquiries
• Credit Age
• Credit Type
• Number of accounts

We will discuss more about these factors in detail further in the article. But before that let’s know more about credit bureaus in India.

Credit bureaus in India

RBI or the Reserve Bank of India has authorized 4 different companies to provide credit ratings under the Credit Information Companies (Regulatory) Act of 2005.

These are mentioned as follows:

1. CIBIL or Transunion Credit Information Bureau (India) Limited
2. Equifax
3. Experian
4. CRIF Highmark

Established in 2000, CIBIL is one of the most preferred platforms accepted by lenders. Any score above 720 or 750 is considered ideal to get loans from the bank and other financial institutions.

Now that you know what exactly credit score is, let’s also help you understand factors affecting credit score.

Which factors affect credit score?

The following factors affect your credit score:

High Impact factors

Some of the factors affect your credit score more than others. Here is a list for you to refer.

Payment History

Your payment history is the first thing any lender will look for in your credit report. Any kind of bounce or late payment paints a poor image of the borrower. Lenders don’t see you as an individual who is credible to avail the loan. Therefore, it is important to pay all your personal loan EMIs and other credit card EMIs on time to maintain a good record when it comes to payment.

A responsible credit/repayment behaviour helps lenders to trust you to pay back the issued amount without any defaults. Any late payment shows up in your credit report and lowers your credit score.

Credit Utilization

After payment history, your credit usage affects your credit score the most. Credit Utilization basically means what percentage of credit are you using from the total credit limit which is provided to you. To give you an example, if your credit card’s limit is 2 Lacs and you utilize around 1.7 lacs of that credit, then it is going to affect your credit score in a negative way.

You can calculate credit utilization ratio by dividing your overall outstanding amount by your total credit limit.

It is advised to use only 30-40% of the credit provided to you. This will help you to maintain a good credit score.

Medium Impact

Age of the credit

Your creditworthiness is also calculated by your history with credit. You need to learn to manage your credit responsibly. A long credit history with on-time payments can help you maintain a good score. Continue using your existing credit cards rather than getting many new ones to get a good credit score.

If you open many credit accounts, it can affect your credit score.

Low Impact

Number of total accounts

The number of active accounts can also affect your credit score. Moreover, you need to mix the kind of credit you are taking. Only keeping secured credit without unsecured can also affect the credit score. It is advised to keep a mix of credit by keeping a credit card (unsecured) and a car or a home loan (secured) to maintain a good score.

Even though this factor has low impact, you should not neglect this one. The way you manage multiple types of credit is a good way to show the lender your creditworthiness.

Your credit enquiries are also considered to a good extent for calculating your credit score. These are a few factors affecting credit score. Keep them in mind for maintaining a good score.

We hope now you know what factors affect your credit score. So, keep these in check to get a good credit score and increase your credit worthiness. You can apply for a personal loan from Airtel Finance with a good credit score right away.