All You Need to Know About Credit Score

If you have ever applied for a loan or Credit Card, you must be aware about the term – Credit Score. It is a 3-digit number generated by credit bureaus that shows your creditworthiness and debt repayment capacity. Banks, NBFCs (Non-Banking Financial Companies), and other financial institutions analyse borrower’s credit score before approving a loan/ Credit Card request.

The most famous and sought after credit bureau in India is CIBIL.

What is CIBIL?

Credit Information Bureau (India) Limited (usually called as CIBIL) is part of one of the leading credit bureaus in the world, TransUnion. Headquartered in Mumbai, TransUnion CIBIL maintains credit records of more than 600 million individuals (60 crores – around 50% of the Indian population) and 32 million businesses.

Every bank and financial institution in India is a member of CIBIL. They are mandated to exchange information about the credit history of every borrower, irrespective of the amount borrowed. The information is updated every month. Based on this information, CIBIL assigns credit scores that usually fall in the range of 300 to 900. The higher the credit score, the better are chances of loan or Credit Card approval.

If you Apply for a Credit Card or loan, various factors go into determining your credit score.

Factors that affect your credit score

• Payment history – Your repayment history is the principal component of your credit score. If you repay your loans on time, you get a better rating. The credit report provides details of every loan you have taken along with the repayment track record. Even a delay of a single day in repaying the instalment gets reflected in the credit report. You will be able to look at your repayment history for the past three years in your credit report. This factor makes up for 35% of your credit score.  
• Amounts owed – This is the second most important determining factor accounting for 30% of your credit score. Two factors play an important role in this section – the sanctioned amount and the utilised amount. The higher the utility, the lower is your rating and vice versa. Therefore, as you repay your loans, the utility ratio decreases. Hence, you tend to improve your score. On the other hand, if you use most of the credit sanctioned to you, you come under the high-risk category.  
• Length of credit history – Credit bureaus need to compare data. Hence, they require a minimum credit history of at least one year before quantifying your score. This factor accounts for 15% of your credit score.  
• Credit mix – This is also a very important factor in determining your credit score. You should have a healthy mix of secured and unsecured loans in your portfolio. Home Loans, mortgage loans, and car loans are secured loans whereas Personal Loans and Credit Cards are unsecured. This factor has a 10% weightage in deciding your credit score.  
• New Credit – Accounting for 10% towards your credit score, this factor plays an important part as well. The higher the credit enquiries, the higher are the number of credit checks on your account. This can impact your score in a negative manner.

What is a good credit score?

This depends on the type of credit you wish to avail. In case of a secured loan, a credit score of 600 is usually considered acceptable whereas you need a score of 750 and above to avail facilities like Credit Cards and Personal Loans.

How can you improve your credit score?

• Improve your repayment history – As this factor accounts for 35% of the credit score, a perfect repayment record improves your credit score.

Ensure that you repay all your loans on time. This applies to your Credit Card dues as well. Repaying the entire balance due of the Credit Cards every month goes a long way in improving your credit score.

• Balance your credit utility – This factor is not applicable to term loans as the utility will always by 100% in the initial stages. However, you can reduce this figure by repaying the loans on time.

Overdrafts and cash credit accounts are secured accounts. Hence, pay more attention to the utility of your credit card limits.

Do not spend more than 20% of the sanctioned limit every month. If you have multiple credit cards, consider distributing the utility so as to bring the overall utility ratio to below 20%.

• Credit period – The longer the credit history, the better your credit score. You cannot do much about this factor except ensuring that you repay your loans on time and prevent classification as a Non Performing Asset (NPA).

• Credit mix – Do not concentrate on a single type of credit – secured or unsecured. Have a healthy mix. Naturally, a higher proportion of secured loans work in your favour.

• New credit – You will receive many Credit Card and Personal Loan offers. It is not necessary to apply for each offer that comes your way. Every credit related inquiry can bring down your credit score.