What is a credit score?
A credit score indicates a person’s ability to repay a borrowed amount. It is a three-digit number between 300 and 900. A credit score closer to 900 indicates that a person is more likely to repay loans on time, while a lower score indicates that the person is likely not to repay the loan. amount. In short, the number represents a person’s creditworthiness.
How important is a credit score?
A credit score is one of the first things a financial institution would check in order to sanction a loan. A better credit rating not only makes it easy for a person to borrow, but also makes them eligible for a higher loan amount. Also, it helps the person to get loans at lower interest rates as they are considered less likely to default.
Factors Involved in Calculating Credit Score
A credit bureau considers the following factors to calculate the credit score:
The payment history contains details such as how many loans the person has had, how long it took to repay them, and how quickly the interest was paid.
Credit utilization rate
It shows the amount of revolving credit available on all credit cards used by a person. The lower the credit utilization rate, the higher the credit score.
Composition of credit
It shows the types of credit a person has such as loans, mortgages, credit cards, etc. The credit mix describes how a person has managed their accounts over time.
New Credits and Approvals
This indicates the number of loans requested by a person over a period of time. If there are more loan rejections, the credit rating is negatively affected.
What is a good credit score?
Any number above 650 on a scale of 300 to 900 is considered a good credit score. The higher the credit score, the easier it is for a person to get loans, credit cards, etc. from financial institutions.
But if a person’s credit score is closer to 350, it indicates that the person is more likely to default on the loan. A lower credit rating makes it harder to get a higher loan amount and also attracts a higher interest rate from the lender. A credit score between 350 and 549 is considered bad, a score between 550 and 649 is considered average, a score between 650 and 749 is considered good, and a score above 749 is considered excellent.
How to improve your credit card score
It is important to maintain a higher credit rating in order to avail credit facilities. But if stuck with a lower credit rating, a person can fix it in the following ways.
Reimbursement on time
It is important to pay unpaid bills, EMIs and interest income on time. Delayed repayments would invite a penalty which negatively impacts credit rating.
Use of credit
Maintaining a credit utilization rate below 30% would help increase the credit rating. Using fully available credit shows a person’s dependence on credit money and makes it more risky for a bank. The lower the credit utilization, the better the credit score.
Number of loans used
Taking too many loans at one time causes the credit rating to plummet. It is advisable to manage finances to repay open loans in a timely manner before availing new loans.
Check credit report
A credit report contains a person’s credit activity, open loans, repayment status, etc., which can show the person’s past mistakes and help prevent them from being repeated.
Number of credit applications
Reducing the number of credit inquiries, i.e. the number of times a person would inquire about a loan with a financial institution, helps to increase the credit score. Multiple inquiries in a short period of time indicate poor financial management and make the person more at risk for credit loans.
Longer loan terms
Choosing a longer tenure for loan repayment helps reduce the amount of IMEs, which helps in timely repayment and also helps in qualifying for higher loan credits.
Deleting old accounts
Deleting old accounts or debt history after repayment negatively impacts credit rating. It is advised not to delete credit history as old records are automatically deleted after some time.
How to check your credit rating?
In India, credit scores are provided by the credit rating agency, Credit Information Bureau (India) Ltd (CIBIL). You can check your credit score by:
Step 1: Go to CIBIL official website
2nd step: Choose the option “Get CIBIL score and report for free”
Step 3: Fill in the personal information page and click on the option ‘Accept and continue’
Step 4: Enter the OTP received on your phone number to complete the verification
Step 5: Click on the ‘Go to Dashboard’ button. This step would direct the user to the site myscore.cibil.com
Step 6: Click on ‘Member Login.’ Once logged in, the user can access the CIBIL score.