What is a Credit Score?
A credit score is a three-digit number that represents an individual’s creditworthiness. Timely repayment of loans and other borrowings show well on your credit history and improve your credit score, while missing payments can lead to your credit score decreasing, signifying poor borrowing habits to your card provider.
Credit Score Range
The credit score ranges from 300 to 900 points, with a low score being bad for your credit health. A good credit score is important because it helps determine how much you can borrow and on what terms. The higher your score, the lower your interest rates will be and the better deals you can get when applying for a credit card. Lenders also look at your payment history when determining whether to approve an application for a loan or line of credit.
Credit Bureaus in India
Credit scores are calculated by a credit reporting agency and then used by lenders to determine how much interest they will charge on loans or credit cards. They also factor into insurance premiums and other financial products, including car loans and mortgages. The most relevant types of credit scores are the CIBIL, Equifax, CRIF Highmark and Experian Credit Score. Each one breaks down different aspects of your financial history into numerical values that are then weighted based on the industry you’re applying for.
Factors Affecting Credit Scores
Consumer credit scores are based on three main factors: payment history (30%), payment type (15%), and amount financed (30%). Payment history includes recent payments, missed payments and late payments. Payment type includes methods of payments made such as cash advances, auto loan repayments and installment loans. The amount financed includes all types of loans, including mortgages and leases.
Credit Scoring Models
Credit scoring is the process of evaluating a consumer's credit worthiness and predicting the risk of default. The goal of credit scoring is to evaluate and predict the likelihood that a person will repay a debt. Credit scoring models are used by all types of lenders, including banks, credit unions, mortgage lenders and finance companies. The model may also be used by consumers to determine the likelihood that they will repay their debts.
Credit scoring models are based on data gathered from a consumer's payment history and other information provided by the consumer. Each credit score has its own unique formula that determines how much credit you can get from a particular lender or store. Your credit score will be affected by many factors, including your income, assets and employment history as well as other factors such as length of time in good standing with creditors or whether you pay your bills on time every month.
How to Check Your Credit Score?
To understand your credit history and get better interest rates and credit card spend limits, it is important to improve your credit score. However, you cannot improve your credit score if you do not know it. This is where credit rating bureaus like Experian, CIBIL, CRIF, Equifax and more come in. You can submit the necessary personal information with any one or more of these credit bureaus to receive a report of your credit score.
How to Improve Your Credit Score?
There are a lot of things you can do to improve your credit score. You can: Get a loan or line of credit. When you apply for a loan or line of credit, the lender will check your credit score. If you have good credit and the lender approves your application, then your score will likely go up. Pay down debt. When you pay down a balance on a low-interest loan, the amount that is paid off reduces the length of time it takes to pay off that debt. The less time it takes to pay off a debt, the better your credit score will be. Keep up with payments on time and in full. If you make all of your payments on time and in full each month, then this can help boost your credit score over time.
Common Credit Score Myths
There are many myths about your credit score in India — and some of them are quite surprising. Here are some common myths about Indian credit scores that you may not have heard before:
1. The higher your score, the better it is: Not exactly. Your score can be affected by numerous factors, including how much money you owe, how much money you earn, how much debt you have, how long it took you to pay off that debt and so on. There's no one-to-one correlation between your score and how good your credit history is.
2. Your credit score should always be over 750: It depends on whether or not you're applying for an expensive loan or high-interest credit card with an annual interest rate above 25%. If yes, then yes; if no, then no.
3. You need a high score to get a home loan: Many banks consider factors other than just credit history when assessing whether someone deserves a home loan or not — such as income levels, property values and expenses like insurance premiums and taxes.
4. If I have a good score, I can get a loan from any bank in India: A good credit score does not guarantee you will get a loan. It just means that your loan application might get approved faster and it may be cheaper for you to pay back the loan.
5. The more credit cards I have, the better my score will be: Your credit history matters more than the number of cards you own. The amount of debt you have on each card is what matters most when calculating your credit score.
6. Credit limits are important because they determine how much money you can borrow from a bank: Credit limits are useful only if they’re set low enough so that you can afford to pay them off in full each month without going into default or having to make payments on time every month or so.
A credit score is issued by one of many credit score bureaus in India to measure the credit worthiness of a borrower. It is one of the many factors that affect the nature of credit extended to the borrower along with their income level, stability and more.