Understanding Your Credit Score
Your financial report card and how to improve your grade.
What is a Credit Score?
A credit score is a three-digit number, typically ranging from 300 to 900, that represents your creditworthiness. In India, the most well-known credit score is the CIBIL score, provided by the credit bureau TransUnion CIBIL. Other bureaus like Experian, Equifax, and CRIF High Mark also provide credit scores.
Lenders (like banks and NBFCs) use this score to evaluate the risk of lending money to you. A higher score indicates a responsible credit history and increases your chances of getting approved for loans and credit cards at more favorable interest rates.
Why is Your Credit Score Important?
- Loan and Credit Card Approval: A good score (typically 750 or above) is often a prerequisite for getting a home loan, car loan, personal loan, or credit card.
- Better Interest Rates: A higher score can help you negotiate for a lower interest rate on your loans, saving you a significant amount of money over the loan's tenure.
- Higher Loan Amounts: Lenders are more willing to offer higher loan amounts to individuals with a strong credit history.
- Quicker Loan Processing: A good credit score can speed up the loan approval and disbursal process.
Factors That Affect Your Credit Score
Your score is calculated based on several factors from your credit history.
Payment History (Most Important)
Do you pay your EMIs and credit card bills on time? Late payments and defaults have a significant negative impact on your score.
Credit Utilization Ratio
This is the percentage of your available credit limit that you are using. For example, if your credit card limit is ₹1,00,000 and your outstanding balance is ₹30,000, your utilization is 30%. Keeping this ratio below 30% is generally recommended.
Credit Mix
Having a healthy mix of different types of credit, such as secured loans (home loan, car loan) and unsecured loans (credit card, personal loan), can be beneficial. It shows you can manage various types of credit responsibly.
Length of Credit History
A longer credit history with a good track record is viewed favorably. This is why it's advisable not to close old credit card accounts that you are not using, as they contribute to the length of your history.
Hard Inquiries
When you apply for a new loan or credit card, the lender makes a "hard inquiry" on your credit report. Too many inquiries in a short period can suggest that you are credit-hungry and may lower your score slightly.
How to Improve Your Credit Score
Pay Your Bills on Time, Every Time
This is the single most important factor. Set up auto-debit for your EMIs and bill payments to avoid missing due dates.
Keep Credit Utilization Low
Aim to use less than 30% of your total credit card limit. You can do this by paying your balance down or requesting a credit limit increase.
Review Your Credit Report Regularly
Check your credit report from all four bureaus at least once a year. Look for any errors or fraudulent activity and get them rectified immediately.
Avoid Applying for Too Much Credit at Once
Space out your credit applications to avoid signaling financial distress to lenders.