Do you know there are more than 900 financial institutions in India from which you can get a loan in a time of need? But how will these institutions decide if you’re creditworthy? – By your credit score.
Your credit score is the first thing that a lender will check when you apply for a loan or a credit card. Having a good credit score is the key to getting your loan request approved quickly.
What is a Credit Score?
A credit score is a 3-digit number ranging from 300 to 900. Your credit score is a summary of your credit history and a parameter of your creditworthiness.
What is a good credit score?
Usually, a score above 750 is considered to be a good credit score. The closer you are to the highest mark, i.e. 900, the higher will be your chances of getting a loan suiting your requirement.
What are the Factors that Affect your Credit Score?
Your credit score is calculated after evaluating a number of factors. There are 4 major factors as explained below:
1. Credit Repayment History
This shows how consistent you are in making timely payments. If you’re paying your instalments on time, your credit score is likely to boost up as this is the most important factor of your credit score.
2. Credit Utilization
It tells about your total credit limit and how much you’ve used till now, i.e. how much you owe. The less credit you use, the better will be your score.
3. Credit Mix
A good credit mix is one that contains at least one secured loan account with a long debt period (e.g. a home loan). Exposure to secured loans keeps you in a good light while a number of unsecured loan accounts shall only add to your disadvantage.
4. Credit Age
This is counted from the date of your first credit (credit card or loan) sanctioned. The older your credit age, the better it will be for your score.
A person having a credit account of 3 years old or more will be preferred over someone who is comparatively new in the credit market.
Other factors contributing to your credit score:
1. Hard and Soft Enquiries:
When you apply for a loan or a credit card, the lender pulls your credit information from the available bureaus. This is called a hard enquiry or pull enquiry. If you’re making too many applications, your credit score may get pulled down.
Note: Multiple loan enquiries in a short span (e.g. 15 to 45 days) are usually treated as one when calculating the credit score.
A soft enquiry is one where you check your credit score on platforms like Paisabazaar. Also, if you have a pre-approved loan or credit card offer and you enquire about that, it will be counted in your soft enquiries and will not impact your credit score negatively.
2. Increase in Credit Limit
Frequent requests for a higher credit limit can also impact your credit score negatively. In this process, the bank asks CIBIL for your reports which can hit your credit score. Thus, request for higher limit only when you really need it.
3. Opening new accounts:
If you’re opening new accounts, it shows that your existing accounts are not enough to fulfil your requirement which translates to a higher credit burden in future. This may bring your credit score down.
Why is a Good Credit Score Important?
According to a survey, 79% of the credit cards approved were for individuals with a good CIBIL score (Most credit bureaus consider a score of or above 750 as a good credit score).
Also, whenever you apply for a loan, your lender is going to request your credit score from credit bureaus. If your score is low, your chances of getting a loan will shrink severely.
Another benefit of a good credit score – better deals on credit cards and lower interest rates on loans. This is because a high credit score shows that you handle your credit responsibly and are less likely to miss payments.
How to Improve Your Credit Score?
If you have an average or poor credit score (falling below 700), you should resort to the following measures:
Dos
- Start making your loan repayments on time and stay consistent in it. Even a single miss in repayment of an EMI can hit your credit score badly.
- Check your credit report regularly. You can check your credit report for free at Paisabazaar.com. Keep a close eye on your credit and if you find any mistake in your credit report, please file for a dispute with CIBIL or any other credit bureau in the country.
- Turn on the autopay option for your EMIs. This way, your payments will be on time.
- If you’re finding it heavy on your pocket to pay one big chunk in a month, split the amount into 2-3 parts and pay throughout the month. This way, you will be able to avoid late payments charges and will be able to maintain your credit utilization ratio.
Don’ts
- Do not file multiple credit card applications unnecessarily. You might think of increasing your credit utilization ratio by applying for more credit cards but it may not be a good option. Most of the lenders do a hard enquiry for your credit report which will affect your score adversely. Instead, request your bank to enhance in your existing credit limit. This will help in lowering your credit utilization ratio.
- Do not close your credit account once you have paid all your credit card bills. This will shorten your credit age and that won’t be favourable to your credit health.
- Take a loan, especially an unsecured loan only when you really need it and you’re sure that you will be able to repay the same on time.
Reasons Why You Have a Low CIBIL Score
Following are the reasons why you may have a low CIBIL Score:
Payment History:
Payment history is one of the most important reasons due to which you have a low CIBIL Score. Not paying bills on time, paying the minimum amount of the credit card bill,etc. lowers your CIBIL Score. So make sure, timely payments are made to avoid your CIBIL Score getting negatively impacted.
Not Maintaining Healthy Credit:
When you don’t maintain the right mix of secured loan and unsecured loan, your credit history as well as your Credit Score will have a negative impact. But lenders will not deny you loan just because you have not availed any secured loan till now.
Multiple Credit Enquiries
A negative impact on your CIBIL Score is seen when you have applied for multiple loans at the same time or there are multiple credit card requisitions at one time. Multiple enquiries portray you as credit hungry and it is not considered good by lenders.
Errors in Your Credit Report
There are times when you can see errors in your Credit Report. Errors like wrong personal details, inaccurate account and loan details, etc. These errors could lead to a lower credit score.
Closing your Old Credit Accounts
Longer the relationship, better is the impact on the credit score. You should not close your oldest active credit account. A longer duration of timely repayments portray you as a better applicant than the one who has a smaller credit history.
FAQs
Q. What is the difference between a credit score and a credit report?
Ans. A credit score is a 3-digit number (between 300- 900) which is the summary of your credit history. A credit report is the elaborated version of your credit history. It includes your personal information, employment information, loans taken, credit cards held and credit behaviour, etc.
Q. What is a good credit score?
Ans. A good credit score should be above 700-750.
Q. How many credit bureaus are there in India?
Ans. There are currently 4 credit bureaus in India, viz. TransUnion CIBIL, Equifax, Experian and CRIF Highmark. TransUnion CIBIL is the oldest of all.
Q. Is it bad if I have no credit history?
Ans. No. When you have no credit history, it simply means that you are new to the system. Lenders do not view this as a bad thing. However, some banks and other financial institutions have certain policies that prevent them from extending credit to new credit users. In such situations, simply apply somewhere else.