January 3, 2019

Credit Score

What is Credit Score?

Your Credit Score is number between 300 and 900 which rates you based on how likely are you to repay the debt taking into consideration your past debt repayment history.

You would have a credit history if you had taken a loan from a bank or a NBFC or you use a credit card. Someone who has never taken a loan or credit before would not have a credit history and thus would not have a credit score as well.

Importance of Credit Score

Your Credit Score helps lenders understand your credit history. The credit profile of an individual is a major input that banks and NBFCs use to determine the loan and credit card eligibility for an Individual.

You must be thinking if it is worthwhile to put effort in improving your credit score. Most people, at some stage of their life require considerable amount of credit be it to pursue higher education, fund dream vacations using credit card or loans, arrange immediate money for wedding, buy a new car, buy a new apartment or for any other purpose.

A good credit score would help you to get funds quickly and at a lower interest rate for all such needs.

Banks and NBFCs classify people with good credit score in low risk category. You should definitely maintain a good credit score to take advantage of low interest loans on loans of higher amount. Home loan is one such example where even a 0.25% reduction in interest rate (for people with good credit score) can help you save a lot of money.

Benefits of a Good Credit Score!

Life, can throw any problem your way, at any time. A lack of financial resources is one of the worst problems that unsuspecting individuals can face. Money, is easily amongst the most crucial resources on the planet. Unfortunately, due to unavoidable circumstances people run out of it, quite frequently. In such scenarios, obtaining a loan can be very beneficial. Thankfully, many organizations offer loans to individuals that are in dire need of money. However, getting a loan is not as simple as many would like it to be. Banks and other money lending organizations, need reassurance that the amount they loan out will be recovered.

Therefore, to ensure this, banks take the credit score of an applicant into consideration. If the credit score is not above the margin, the loan is not sanctioned. Whereas, if the credit score is decent, then the applicants can borrow large amounts of money relatively easily. Having a good credit score has many other advantages, let’s take a look at a few of them.

Eliminate security deposits:

If the applicant has a good credit score, the banks often grant a loan without demanding a huge security deposit. This is particularly true in case of utilities. Applicants with a good credit score can escape paying a humungous deposit when establishing utility service.

More power during negotiations:

Power is intoxicating and it’s not harmful. If any applicant has a good credit score, they can leverage it to lower the interest rate on any loan. Essentially, lenders want to give loans to people who have the capacity to repay it. So when an applicant who has a good credit score sits across the table, lenders can’t imagine letting the opportunity go.

Borrow Limitless:

Nobody likes being limited to a certain outcome. Well, if you have a good credit score, chances are that the lender won’t frown when you ask for a bigger loan. The good credit score, showcases your ability to pay back on time. So lenders won’t be doubtful while lending you a huge amount of money.

Better chances of getting a job:

In some parts of the world, employers take a look at a candidate’s credit score before hiring. This is done because a bad credit score might indicate that the candidate has a reckless lifestyle. So, employers nowadays are more likely to reject a candidate if he/she has a bad credit score.

Foreign travel:

Travelling expands the mind. But you won’t get a chance to do that if you happen to have a bad credit score. Governing bodies, don’t issue often don’t allow an individual with damaged credit score to travel overseas. Students who wish to study at a foreign university, often find it hard to obtain a loan due to bad credit score.

So it is fairly clear that maintaining a healthy credit score is essential. It can have a huge impact on a person’s life. Following simple rules like paying bills on time, restricting credit card usage and keeping a watch on credit card reports can be very helpful in maintaining a healthy credit score. Now that you know the importance of having a good credit score, you must make the necessary changes to your lifestyle and be prepared to overcome any financial adversity.

How is your Credit Score Calculated?

Your Credit Score is calculated based on various factors pertaining to your credit profile as below

  • Credit mix – Types of credit you have taken in the past which could include secured and unsecured credit like Personal loan, home loan, credit cards, car loans, student loans etc
  • Payment history – Consistent payments are desired for a high credit score
  • Credit history – Consistent credit repayment behavior over a longer tenure reduces the risk for lenders.
  • Credit limits that had been given to you
  • Credit Utilization Ratio – How much credit had been consumed by you against the assigned credit limit. Low credit usage against the assigned credit limit is recommended.
  • Amount of debt you have
  • Hard Enquiry

What is considered to be a good credit score?

A Credit Score greater than 750 is considered a good credit score by Banks and NBFCs. Credit score of 750 and above reduces the risk for Banks and NBFCs as you are perceived as an individual who has a track record of making consistent payments as per repayment schedule. Such individuals changes of defaulting on payments are considered low, thus lenders usually provide high credit limit and lower interest rates to such individuals.

What causes bad Credit Score?

A bad or a poor Credit Score can be a result of any of the below factors

  • Late or Irregular Payments against your monthly credit card bills or against your loan emi hurts your credit profile
  • Defaulting on Loan – If you had not repaid any loan this would have resulted in a poor credit score
  • High Credit Utilization – Your credit score is affected if you regularly use more than 50% and closer to 100% of your credit limit
  • Write-offs & Settlements – Banks and NBFCs would classify you as a high risk borrower if any of your past loans and credit card balances have been written off by them.

How to Improve your Credit Score?

Defaulting on monthly credit card bills and emi can happen to many people. With a bad credit score easy access to credit become difficult.

A poor credit score can always be improved by taking corrective actions. Though it would take some time to improve your credit score, it is worth taking right steps to improve the credit score.

Rebuilding your credit score would take some time as there are no shortcuts. You would need to understand and review factors that had resulted in poor credit score.

Why you could have different Credit Scores with different Credit Bureaus

In India there are three major credit bureau Cibil, Equifax and Experian. Each Credit bureau uses a different way to calculate the credit score. Also, the credit scores may be different if your bank or NBFC does not share updates with all the credit bureaus. Some Banks and NBFCs may be share updates with one or two credit bureaus only.

You may thus have multiple credit score simultaneously with different Credit Bureaus.