Posted on: December 30, 2016

What is Credit Score and How is it Calculated?

Credit Score

What is Credit Score?

Your credit score is a 3-digit number between 300 and 900 that depicts the credit worthiness of an individual who has taken a loan or had a credit card in the past. In India, prospective lenders have the option of using credit scores calculated by CIBIL TransUnion, Experian, Equifax or CRIF HighMark to grant a loan. As CIBIL is the oldest of these, many lenders consider CIBIL score to be the benchmark for granting a loan to an individual. Your credit score reflects the credit and repayment history, utilisation of credit, tenures of previous debts, and so on. Though every bank in India has its own cut-off limit to give loans the higher your score is to 900, the better you chances of being approved for new credit.

How is it calculated?

The CIBIL score of any individual is calculated on the basis of several important factors especially the credit history of the applicant and his or her credit repayment behaviour. Every credit information company uses its proprietary algorithm to calculate the score thus the actual weight assigned to each factor is not available to the general public.
Here is a look at the various aspects that contribute to an individual’s credit score.

Credit History:

Experts say that this factor plays a major role in determining your credit score. This factor contains information about your previous credit card and loan payments as well as whether you have repaid them on time, missed your payments or paid after the due date. Any type of loan or credit card payments default negatively affects your credit score and is reflected in your credit history. You need to clear all your dues and debts within the time limit to use this factor to an advantage.

Credit Type:

This is the other key factor that affects your credit score. Credit bureaus like CIBIL, Experian, Equifax and CRIF HighMark consider the type of loans (secured or unsecured) that you have taken in the past and how old your credit history is. Those with high credit score usually have a mix of secured and unsecured loans instead of only relying on a single type of debt like a personal loan or credit cards. Mixing a credit card (unsecured debt) for instance along with a property loan (secured debt) may be better than simply relying on a credit card to maintain a high score.

Credit Exposure:

This also contributes to how high or low your credit score is. If you have some debt such as a credit card that you use, it skews the score to the higher side while having no debt at all may work against you. In addition, individuals who have a lower debt to credit ratio (<40%) tend to have a higher credit score as it acts as proof of their ability to take on additional debt and repay it in the future.

Other Factors:

There are some other factors as well which are responsible for a good (high) or bad (low) credit score. The remaining of the total credit score is based on these factors. Applicants who have successfully handled credit such as loans and credit cards longer tend to have higher credit scores. On the flip side individuals who have been denied multiple times for new credit tend to have a lower credit score as these lender checks show up on your credit report.

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