In India, credit scores are gaining significant prominence for tracking financial health. However, many people still do not pay enough attention towards it.

In this blog, let’s understand what is a credit score, its importance, the various parameters considered in its calculation and how you can improve your credit score.

What is a Credit Score?

A credit score predicts the borrower’s credit behaviour, such as the likelihood of timely repayments. Lenders rely on this crucial parameter prior to loan disbursals.

In India, credit scores typically range from 300 to 900. A higher credit score indicates better creditworthiness, leading to more favourable loan terms, such as lower interest rates and higher credit limits.

Who generates Credit Scores, and how to check your Score?

The Reserve Bank of India has authorized credit bureaus to maintain credit records of borrowers.

Some of the well-known bureaus include:

• Transunion CIBIL
• Experian
• Equifax
• CRIF Watermark

You can check your credit score for free once a year from any of the credit bureaus.

How is your Credit Score calculated?

Several factors are considered when calculating your credit score:

• Payment History: Timely payments for credit cards, loans, bills, etc., are crucial. Late payments and defaults can negatively affect your score.

• Average Length of Credit: This includes the duration of old and new credit accounts. Longer credit histories tend to be more favourable.

• Credit Age and Account Activity: It considers the age of your individual credit accounts and recent account activity.

• Credit Limit: The total credit limit on your credit cards and other revolving accounts.

• Credit Utilisation: The amount of credit you’re using compared to your total available credit. A lower credit utilisation ratio is usually better for your credit score.

• Credit Account Balances: The balances on your credit accounts, especially credit card balances, are reviewed. High balances relative to your credit limits can negatively affect your score.

• New Credits: Recent credit inquiries and new credit accounts opened are considered new credits. Multiple recent inquiries can suggest a higher credit risk.

How does your Credit Score affect you?

A poor credit score indicates higher credit risk and reduces your chances of securing a loan. Generally, any score above 700 is considered good by lenders.

Advantages of a Good Credit Score:

• Ability to receive loan offers from lenders when needed.
• Improved ability to negotiate loan terms.
• Demonstrates financial punctuality.
• Increased possibility of obtaining longer tenure loans.

How can you Improve your Credit Score?

Improving your credit score is not an overnight process, but you can take these long-term steps:

• Always make timely EMI and credit card payments.
• Use a lower percentage of your credit limit.
• Continue using your older credit cards to build a credit history.
• Avoid restructuring offers.

In simple terms, maintain a good credit culture, pay your EMIs and credit cards on time, don’t accumulate too much debt, and stay consistent and disciplined.

Conclusion

Since the establishment of credit bureaus, lenders have relied on credit scores before disbursing loans. It’s crucial to practice financial prudence to maintain a good credit score and a strong credit history.