If you are planning to borrow money from a bank or apply for a credit card, then your personal credit score matters a lot. It is an indication of the credit risk (or no risk) that you possess to money lenders. A good credit score is what each of us must aspire for as it is one of the important factors that determine whether one will get a loan at low interest rate or not. Credit score ranges from 300 to 900 where any score above 800 is a good credit score. In India, these scores are given by the following credit bureaus
Decoding the Range of Credit Score
As discussed above, a credit score ranges anywhere from 300 to 900. Here is a comprehensive breakdown of the credit score levels.
Excellent Credit Score (800 and above):
Borrowers whose credit score falls under this range are considered to be highly responsible…financially. Any bank would love to lend money to them. Also, they are the prime candidates to get a loan easily and at the lowest interest rates. They have no or little history of late bill payments and are considered low risk for defaulting credit agreements.
Good Credit Score (700-800):
Borrowers whose score is between 650 and 800 are considered to be financially responsible when it comes to credit management. They might have missed a payment or two but generally, most of their payments including loan repayments and credit card bills are paid on time. Also, their credit utilization ratio is optimum. These borrowers will get a loan from banks easily but might have to settle for higher interest rates.
Average Credit Score (500-700):
If your credit score falls from 500 to 700, then you have an average credit score. This means you will have to work on your credit file. Although, one might not get a loan from bank easily, but with this credit score, you are likely to improve it in a couple of months by following the best practices like paying credit bills on time, keeping the right credit mix and avoiding closing old account for a longer credit history.
Poor Credit Score (Below 500):
Any score below 500 means that you have a history of several missed payment deadlines, default credit accounts, etc. If you visit any bank or NBFC to lend money, you will be rejected right away or given credit at a very high rate of interest.
How is Credit Score Calculated?
Each credit bureau has their own algorithm to calculate an individual’s credit score. This is the reason why the credit score of these agencies often differ. However, the major element that affects your credit score is your credit history. The score is calculated based on the following major factors:
Credit Repayment Behavior
Credit score can only be calculated if you have taken any type of credit like a loan or a credit card. The score is calculated based on your repayment behavior. If you have been paying all the credit bills on time, then it will have a positive effect.
Credit Utilization Ratio
This is the ratio of the credit that you are using with the total available credit. In order to score high, it is important to maintain a balance between the two.
Credit Type and Duration
It is important to keep a balance between the types of credit that you have opted for. For example, if you have only taken unsecured loans like personal loans or credit cards, then it will have a negative impact on your credit score. Similarly, the duration of your credit accounts affects your credit score. The older the account, the higher will be your credit score.
Excessive Number of Hard Inquires
If you have applied for multiple loans or credit cards in the recent past irrespective of whether the application was accepted or rejected, it will have a negative impact on your credit score. This is because it indicates debt burden on you, which is likely to increase, leading to a marginal impact on your credit score.
How to turn your Average Credit Score into an excellent Credit Score?
One might wonder the importance of credit score. Well, it is an important decision making tool for banks and other money lenders from where they anticipate if you are likely to repay the loan on time. If you have a good credit score, then you will easily qualify for a loan at lower rates, thus saving a lot of money on interest. If you have an average credit score, then you are likely to improve it by following some of the best practices, as mentioned below:
Learn Money Management
Check the number of open credit accounts and their average monthly expenses. Evaluate if you are able to pay those expenses on time without incurring overdraft fees.
Maintain Good Credit Habits
The number one rule of improving your credit score is paying bills on time. Try not to pay after the due date. You can take help from various financial apps available or opt for automatic payment for those bills from your account.
Balance Credit Utilization Ratio
Another important factor that affects your credit score is the credit utilization ratio. In order to improve your average credit score, you can either increase your credit limit or try not to over use it. The golden rule is to use 30% or less of the credit limit. This means if your credit limit is Rs. 10,000, then keep the monthly balance under Rs. 3000.
Do Not Close Old Accounts
Till the time you reach an excellent credit score (say above 800), avoid closing old accounts. Since the credit score depends upon the length of the credit history, closing those old, unused credit account actually end up hurting your credit score.
Stop Shopping for New Credits
Avoid applying for a credit card unless actually needed. Too many hard inquiries like applying for multiple loan or credit card in a small time frame might actually affect your score negatively.
