What is a Credit Score? Credit Score 101

What is a credit score is a fundamental question asked by 'new to credit' consumers who look at availing their first loan or credit card. Besides the question 'what is a credit score', such consumers tend to look for answers regarding 'what is a good credit score.'

First, let us check out - 'credit score meaning’, then we will discuss ‘what is a good credit score’.

Credit score is a measure of an one's creditworthiness or his potential to repay loan EMIs and credit card dues on time. It is generally expressed in the form of a number. It is calculated based on the individual's repayment history, credit profile, credit mix, CUR (credit utilization ratio), length of credit history etc. A credit score is even addressed by the term credit rating.

What is a Good Credit Score?

Credit score refers to a three-digit numerical representation of one's financial health that ranges anywhere from 300 to 900, based on which the lenders examine potential applicant's creditworthiness. The score is derived by assessing one's past credit repayment, credit mix, credit history length, credit utilization ratio (CUR) etc.

A credit score of usually 750 and more is considered good and favourably looked upon by the banks/financial institutions while approving the applicant's credit application. Apart from boosting one's credit approval chances, a strong credit score even assists one to fetch lower rates on loans, avail reduction/waiver on loan's charges and get pre-approved offers on loans and credit cards. Moreover, some sectors have even gradually picked up considering credit scores for assessing job applicants.

Additional Reading: What is cibil grievance?

Why is Credit Score Important?

A credit score is a financial asset and plays a crucial role in getting one's credit card and loans approved. Here we will state 6 reasons as to how credit score can ameliorate your financial health.

Enhances loan eligibility prospects

Lender avail credit reports of the loan applicants for evaluating their creditworthiness. Generally, those with 750 and above credit scores have increased chances of availing of loan approval because they are looked at as financially responsible and have reduced credit default risk. On the contrary, those with a poor score of below 750 are considered riskier prospects by lenders and thus have reduced chances of availing of loan approvals.

Lowers rates on loans

Lenders have started adopting risk-based pricing models to set the rates for their applicants who apply for loans. As applicants with credit scores of 750 and above are considered to have reduced risk, most lenders try attracting these applicants with reduced rates. On the contrary, lenders make up for the higher risk included in lending those with reduced scores by charging higher rates on loans.

As risk-based pricing can differ across numerous lenders, applicants must compare loan interest rates to as many lenders as possible before they zero on a specific lender. For the comparison purpose, the applicant may consider visiting online lending marketplaces to view various loan offers being offered by multiple lenders based on his monthly income, credit score, job profile and others.

Additional Reading: How to check cibil defaulters list?

Reduced or waiver on loans processing fees

Few lenders have even begun rewarding their applicants with strong credit scores by reducing or waiving off their loan's processing fees. As the processing fees can add up to a considerable amount, particularly in situations of big-ticket loans, reduction or waiver of processing fees can lead to a sizable reduction of the credit cost. These preferential treatments in processing charges are very much unlikely for those loan applicants having lower scores of below 750.

Increased chances of credit limit increment on existing credit cards/approval of new credit card

The reason behind opting for a credit card is not just restricted to availing of credit instantly. Opting for a credit card is even about availing numerous advantages such as cash backs, discounts, reward points/air miles, EMI options etc., through card transactions.

Similar to loans, card issuers factor in credit scores when assessing the applicant's credit application. Thus, those having strong scores have enhanced chances of availing of credit card approval.

A good credit score of 750 & above even assists in availing credit card limit increment. An enhanced credit card limit will increase your spending power via credit cards and thus boost your potential to conduct big-ticket transactions or face financial emergencies/shortfalls.

Enhanced accessibility to pre-approved loans & credit card offers

Many lenders and even financial marketplaces provide pre-approved loan offers, and numerous credit card offers based on one's credit score. These pre-approved loans and credit card offers usually come with low rates, better features and instant disbursal. Their instant disbursal feature makes them one of the best options for those in need of instant funds in case of financial shortfalls or emergencies.

Why you need a Good Credit Score?

What is a good credit score, as answered before, refers to a score of 750 and above. Having a score of 750 and above allows one to get their loans approved faster at comparatively reduced rates and processing charges. Note that as building a good credit score is a process that can stretch for quite a long, consumers must develop the habit of reviewing their credit report periodically and taking required measures to maintain or facilitate the score. Reviewing your credit report regularly not only assists to keep a thorough check on your behaviour concerning credit but even helps to recognize errors or any incorrect data in the credit report that may be responsible for lowering your score. On-time correction of such errors or inaccurate data or improvement of your credit behaviour can automatically enhance your credit score, which further can improve your eligibility prospects for availing credit cards and loans in future.

How is Credit Score Calculated?

Credit score gets calculated by the credit bureaus. They calculate one's credit score by assessing their past credit repayment record, a mix of credit, credit utilization ratio or CUR, credit history length etc.

How to Check Your Credit Score?

As now you know – what is a credit score and what is a good credit score, it is also important for you to know how to check your credit score. You can check your credit score either by visiting the credit bureaus site or through online financial marketplaces.

How to Improve your Credit Score?

Credit score has become an essential financial asset today. It is because a strong score of 750 and above allows consumers to avail loans faster at reduced rates and processing charges. It even allows one to get better credit card deals. Moreover, note that today's credit score is being used to evaluate one's creditworthiness by lenders/issuers and is steadily becoming a crucial deciding parameter among employers for selecting you for a specific job role. Here is a list of ways about how you can improve your credit score:

Timely and full loan EMIs and credit card bill repayment

Lenders highly prefer those with disciplined repayment credit history for lending. Also, credit bureaus give more weightage to past credit repayment while calculating your score. Thus, ensure to repay your loan EMIs and credit card bills on time in full. Such disciplined activities get recorded in your credit report, which improves your credit score, which further boosts your future credit card and loan eligibility prospects.

Keeping CUR/credit utilization ratio within 30%

CUR is the portion of the total credit card limit utilized by you. Those with over 30% CUR may not be preferred by lenders while evaluating one's credit application for lending. This is because they consider those with such CUR as credit hungry individuals. Credit bureaus also score such individuals with over 30% CUR negatively. To pull your CUR down, you should either request a credit limit increment on your existing cards or opt for additional credit cards.

Also Check: Experian credit score

Avoid making direct credit card or loan enquiries multiple times

On receiving a credit application, lenders pull out the credit applicant's credit report to evaluate his credibility from the credit bureau. Note that such inquiries are hard inquiries wherein credit bureaus lower your score by a small margin. However, submitting multiple inquiries for credit within a short period of time can be dangerous as it not just reduces your score by a great extent but even gets you viewed as an individual who is credit hungry. In place of submitting direct credit card or loan inquiries to the lenders/issuers, opt for online lending marketplaces for comparing and selecting a suitable lender/issuer basis your eligibility and needs. Inquiries for a credit report by such online portals are soft inquiries, which have no negative impact on your score.

Higher proportion of secured loan in a credit mix

Credit bureaus even factor in your credit mix, which is the concentration of your unsecured and secured loans as an important factor for credit score calculation. Note that lenders generally look for lending with a higher concentration of secured loans, namely loan against property, home loans etc., in their credit mix. Thus, to maintain a good mix of credit, you should replace your unsecured loans, such as loans against credit cards, personal loans etc., with secured credit options. Those looking to improve their score quickly can consider prepaying their unsecured loans as doing this can enhance their secured loans concentration in their credit portfolio.

Regular monitoring of your guaranteed and co-signed loans

When you become a co-signer or guarantor of a loan, this makes you equally responsible for timely loan repayment. Any delay or default made by the primary loan holder will not just lower his credit score but also negatively impact your score. Thus, ensure to keep a close watch on such loans regular repayments. Failure to do so may lower your score, which might affect your credit card and loan approval chances in future.

Periodic evaluation of your credit report

Credit reports come with details regarding your past and your current credit card and loan account, depending on which the bureaus assign you a credit score. However, note that such reports might contain illegal transactions in your name and clerical errors, which might be responsible for reducing your credit score. Thus, a periodical evaluation of your report assists you in identifying such issues and frauds. Rectification of such issues can help enhance your score.

Additional Reading: Cibil score required for home loan

FAQs

✅What do you mean by credit score?

Credit score meaning – It is a numerical representation of one's creditworthiness /financial health. Credit bureaus derive credit scores by evaluating credit repayment history, credit mix, CUR, credit history length etc.

✅How is credit score calculated?

Credit bureaus calculate a credit score based on factors like one's past credit repayment, CUR, credit mix, credit history length etc.

✅What is a credit score, and how does it work?

Credit score refers to a three-digit numerical representation of your financial health that ranges anywhere between 300 and 900 based on which lenders assess the applicant's creditworthiness.

A credit score equalling 750 and above is generally looked upon as a good score. Having a higher score not just boosts one's credit approval chances but also helps avail loans at lower rates and fees.

✅Is 725 a good credit score?

No, a score of 750 and above is usually considered to be good.

✅How can I quickly raise my credit score?

Credit scores can be improved by abiding by good credit habits. Such habits include timely and full repayment of credit card dues and loan EMIs, balanced mix of credit, keeping CUR within 30%, regularly monitoring guaranteed/co-signed loans, not making multiple credit inquiries within a short span of time and periodically reviewing credit reports for timely detection of wrong data/transactions.