The 3-digit credit score number shows how likely a borrower is to be accepted for credit. Before a lender agrees to lend money, they will evaluate the borrower’s ability to replay the same.
What is a credit score?
“A credit score is a three-digit number that shows how likely a consumer is to be accepted for credit. Before a lender agrees to lend money, they will evaluate the borrower’s ability to repay the same. To do this, lenders look at credit score, which is provided by a credit bureau. The credit score ranges from 300 to 900, 900 being the highest. The higher the credit score, the greater the chances are of the lenders approving disbursement,” says Neeraj Dhawan, managing director, Experian India, a credit information services company.
How is a credit score calculated?
Each of the bureaus has its own methodologies to calculate the credit scores. “Some of the qualitative factors, which the credit bureaus keep in mind are – loan repayment history, credit card bill payment cycle, type of loans taken, amount of borrowing vs. eligibility, outstanding balance, duration of borrowing, short and long term borrowing, secured and unsecured loans and basic discipline of repayment. Each of these parameters with their assigned weights leads to your unique credit score, which changes from time to time as your income and debt cycles fluctuate,” mentions Pramod Kathuria, co-founder and CEO, Easiloan, a fintech start-up.
Benefits of a good credit score
Lenders usually consider credit scores of 750 and above as good credit scores. Those having such credit scores are considered to be more creditworthy and financially disciplined than the rest. “Home loan applicants having a high credit score have a higher chance of getting home loan approval. Besides, home loan applicants having a higher credit score have higher chances of getting their loans approved at a lower interest rate,” adds Radhika Binani, chief product officer, Paisabazaar, an online marketplace for financial products.
A good credit score will vouch for you in many ways, including your overall behaviour in handling money and other valuable assets that you have created besides your general attitude towards financial obligations, including your utility payments.
“The better your score, more are the chances of getting a higher loan with longer tenure. A good credit score can help with a swift and hassle-free home loan processing procedure because the credibility of repayment is already verified. Also, once the lender is interested in providing a loan based on good credit score, the borrower has the negotiation power and can ask for a discount on loan processing fees and other charges,” mentions Dhawan.
How can you maintain a high credit score?
Subhrangshu Chattopadhyay, national sales head, CRIF High Mark, a leading credit bureau lists out some ground rules to follow if a borrower wants to maintain a high credit score:
Avoid defaults: Make all your EMI payments on time and clear dues appropriately. By avoiding late payments, defaults, foreclosures, etc, you can improve your credit scores.
- Keep a check on your credit utilisation ratio: It is the ratio of your credit limit to your credit spending. It is advisable to keep the credit limit in check so that you do not overshoot your limit.
- Only opt for loans that can be managed easily: It is wise to avail credit after a thorough thought on its need and repayment capacity.
- Do not delete your old accounts: A long credit lifecycle is a positive indicator of your credit management abilities and lenders pay close attention to your credit history.
- Include secured loans in your credit mix: Have a good balance between unsecured loans, such as credit cards and secured loans like home loans, etc to better your scores.
- Monitor credit reports regularly: With constant monitoring, you can notice a shift in your credit scores and take the necessary corrective course.
Top reasons for a poor credit score
“If you have consistently delayed making payments, it can affect your credit score. Multiple ongoing loans might also affect your credit score. The reason being loans taken will be from different banks, which will increase the debt burden and will decrease the ability to repay. Simply having unsecured loans is also not good for your credit score. Also, if a borrower doesn’t have a track-record of credit history to show, then the credit score will be zero,” says Dhawan.
“Any score less than 750 opens a long tail of requirements. You will have loan providers who will also ask for a higher rate of interest. And if you are in the 300-600 range, then not only will you have to shell more interest and processing fee, you will also have to comply with additional documentations, guarantors, and a longer than usual sanction process,” explains Kathuria.
Dos and don’ts
- Pay your credit card dues on time and avoid defaulting on your EMI;
- Try to contain your credit utilisation ratio within 30 per cent. Credit cardholders frequently utilising more than 30 per cent of their total credit limit should either enhance their credit limit or get additional credit cards as well;
- Regularly check your credit report for inconsistencies and errors and don’t delay in filing a dispute with the credit bureau by ignoring errors in your credit report.