A credit score is three digit numbers ranging between 300 to 900. It reflects how well or improperly a person has dispensed his/her loans or credit cards in the past. It is one of the important tools that lenders or banks in case of home loans or credit cards; use while deciding if they should lend money to a borrower or not.
In India, there are 4 companies which provide information about your credit score. All these companies are licensed by Reserve Bank of India. They include Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax, and Highmark. Among all, the oldest one is CIBIL, which started functioning in India in 2000. Since its inception, they have maintained largest collections of consumer information globally.
How to calculate a credit score?
A credit score is calculated on various factors, especially your payment history, loan repayment track record and many others ways for example:
- Your total available credit balance
- The number of loans and credit cards you have.
- A balance between your secured and unsecured loans
- Credit utilization
Then a credit scoring algorithm is used by credit bureaus to calculate the credit score. A credit score not only help banks in assessing one’s loan eligibility but it also helps in understanding your loan worthiness. The higher your credit score, the higher are your chances of getting loan approved.
How does a credit score determine your loan eligibility?
As said earlier, a credit score ranges between 300 to 900. However as closer you are to 900, your loan approval criteria increase a lot. Banks and financial institutions are happy to give loans to those who have a good credit score. All you need is above 750 which are considered a good credit score.
But if you have a score less than 750, then banks feel that there is a risk to give a loan or issue a credit card.
Benefits of good credit score
A good credit score provides lots of benefits to a borrower such as low-interest rate, higher loan amount, quicker loan approval process and higher repayment period. So, in order to maintain a good credit score, you must follow these steps:
- Making payments for your loan dues on time
- Maintaining a balance between secured and unsecured loans
- Reducing the number of loans you borrow in a particular year
- Ensuring your debt-to-income ratio is low
Difference between credit score, credit report and credit rating
There is a lot of confusion when these three terms come in front of a common man. However, there is a lot of difference between the three and one must not get confused between them, let’s understand their basics in detail:
- A credit score is a three-digit number which gives information about one’s loan eligibility. On the other hand, a credit report is a historical record of an individual’s repayment schedules of loans and credit cards. Differently, a credit rating tells about the creditworthiness of companies, government or a country.
- While a good and a bad credit score increase or decrease your chances of getting loan approvals, a clean credit report makes a good credit score; it means that a borrower is good in repayments of loans and credit card bills, on the other hand, a credit rating is usually denoted by grades such as AAA, AA, B++ etc. More good is your rating; more will be the chances of raising funds for any company.
- The credit score changes as per the debt management by the borrower on the other a in a credit report one cannot make a change before 5 years. Whereas in a credit rating, changes depending upon the performance of the industry, the market or the company/country.
CIBIL 2.0- a new addition
In order to get a better understanding of defaults, CIBIL TransUnion has been shifting to a new scoring model which is termed as CIBIL 2.0. The new model is more relevant with changing customer credit data and profiles as well as current economic trends. Under this, an individual is measured in a risk index from 1 to 5 with relatively new credit history. Higher is the numeric value of the risk index; better are the chances of quick loan approval.