A credit score is a numerical representation of your creditworthiness. It reflects how likely you are to repay borrowed money based on your financial history, including how well you manage loans, credit cards, and other forms of debt. The higher your score, the more trustworthy you appear to lenders.
What is a Credit Score?
A credit score is a numerical evaluation of an individual’s creditworthiness, ranging typically from 300 to 900. It is calculated based on factors such as payment history, credit utilisation, length of credit history, types of credit in use, and recent credit inquiries. Credit bureaus compile this data from your financial activities, such as paying loans or credit card bills, and generate the score.
Why Is Credit Score Important?
A good credit score is crucial for obtaining loans at favourable interest rates, securing credit cards with higher limits, and even influencing factors like rental approvals or insurance premiums. It shows lenders you’re a responsible borrower, reducing their risk. A poor score, on the other hand, can lead to higher interest rates or loan denials.
If you’re unsure about where you stand or how to enhance your credit profile, speaking with a financial expert can help you navigate the best strategies for boosting your score and achieving your financial goals.
Priyank Shah, Co-Founder & CEO of The Financialist, a financial planning startup, shares the relevance of credit score for an individual.
A credit score is an indicator of a person’s creditworthiness, or their ability to repay debt. It is derived from the individual’s credit behaviour and repayment history across different sources of credit, Shah said.
What’s A Good Credit Score?
According to Shah, credit scores range from 300 to 900 and scores above 750 are considered good.
“An individual with a high credit score gets benefits, such as higher credit limits, low interest rates, access to more lenders, quicker and higher chances of loan approval,” Shah added.
Shah underlined important things to note while maintaining your credit score:
- Pay your EMI or credit dues before the due-date. Set up automatic payments or reminders to avoid late payments.
- Pay your EMI and outstanding dues in full. Avoid part-payments or just paying the minimum amount due.
- Target 30% or less utilisation out of the available credit card limit.
- Avoid relying solely on one source of credit.
- Apply for new credit only when necessary. Multiple applications in a short period can negatively impact your score.
- Don’t close old credit accounts, especially long standing ones.
- Check your credit report at least once a year. Report any discrepancies immediately.
- Be cautious with co-signing or guaranteeing loans. You’re equally responsible for repayment and any defaults will affect your score even on a loan where you are a guarantor.
Is Credit History Necessary?
Shah said that in India, having no credit history can be a disadvantage, as lenders prefer some credit history to assess risk. It’s important to start having a credit card early and use it responsibly to build a good credit history, he said.
How to track your Credit Score in India?
RBI has approved four credit information companies: TransUnion-CIBIL, Equifax, Experian & CRIF High Mark. One can access Credit reports with any of the above agencies.
Online platforms such as Google Pay, PaisaBazaar, etc offer simple and quick access to the credit score.
However, “for accurate tracking of your credit score and keeping data privacy in mind, it’s important to obtain your official report from either of the four official credit agencies,” Shah underlined.
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