Banks, non-banking finance companies and other financial institutions offer various kinds of loans and credit to individuals. These include personal loans, home loans, vehicle loans, education loans, gold loans, agriculture loans, top-up loans, loans against insurance policies, credit cards, among others.
To determine whether the borrower will be able to meet the credit or the loan repayment requirements smoothly, financial institutions largely depend on credit scores provided by credit bureaus.
Let’s understand what a credit score is and why a good credit score matters.
What’s A Credit Score?
A credit score refers to a three-digit number ranging between 300 and 900 that indicates your creditworthiness as a customer. The higher the credit score, the better your chances of receiving a loan from potential lenders.
In other words, a credit score reflects your credit history as a customer. Whenever you approach a lender for a loan or a bank for a credit card, the first checkpoint is to evaluate your creditworthiness by your credit score. Once lenders or bankers know this score, they can immediately assess whether it is safe to advance you a loan or offer you a credit card.
Among the parameters that comprise of your credit score are:
- Number of open accounts
- Total level of debt
- Types of credit taken
- Outstanding loan amounts
- Repayment history
As a result, apart from maintaining a healthy credit score, you must keep checking on maintaining these parameters periodically to ensure your credit score does not fall due to an oversight. You could do this by regularly paying off any existing debt on credit cards while maintaining credit utilization below 30% as far as possible.
How is Your Credit Score Determined?
Although every credit bureau—an organization that collects the credit history and other details of individuals to provide to lenders—follows its individual scoring modalities, credit scores are typically derived via an automated evaluation process.
The four main entities offering credit scores in India are TransUnion CIBIL, Experian, Equifax and CRIF Highmark. CIBIL being the first credit bureau to be established more than 20 years ago became most popular among financial entities for credit score checks.
Your credit score may show minor variations between data from different credit bureaus at some point in time but the weightage given to select criteria for you to obtain a loan remains the same.
These criteria are categorized as:
- Payment history – 35%
- Credit utilization – 30%
- Length of credit history – 15%
- Credit mix – 10%
- New credit – 10%
Once all these variables are considered, the score is calculated using a mathematical algorithm. Taken together, these help determine the probability of you repaying the loans on time. What’s important to know is that your credit score keeps changing periodically with latest data updates from your credit accounts.
How Can A Good Credit Score Help You?
This score offers an overall view of your credit health or creditworthiness. The score provides this overview by:
Informing about your current credit standing
The credit score report lets you know about where you stand during this period plus what should be your focus areas. This is done through a summary of past and present credit transactions. By regularly checking the credit score, you will be in a position to quickly pinpoint any issues or anomalies that could have reduced your score. You can then take faster action in addressing this situation.
Procuring the best loan and credit card offers
A good credit score lowers the risk for lenders and bankers that you may default in payments or other commitments. A credit score of 750 and above is good to get the best deals and discounts.
Getting Better terms and lower interest rates for credit cards and loans
Banks and other lenders will be most eager to offer you loans and credit cards on better terms and lower interest rates if your credit score rocks. Additional benefits may include discounts on the processing or other fees, and eligibility for a higher loan amount.
Availing greater chances for loan and credit card approvals
If you are categorized as a low-risk borrower, the chances of credit cards and loans being approved are much higher.
Making you eligible for the most-rewarding credit cards, pre-approved loans and other offers
For those interested in premium credit cards, a high credit score will boost your eligibility. From cards with the lowest rates of interest or top-class rewards such as travel points and cashback, a good score opens a new world of opportunities for credit-lending products.
A good credit score also automatically opens doors for pre-approved loans and other offers. Such offers are only given to existing customers or those who hold a healthy credit history.
Getting you approval for a higher limit on credit cards
The better the credit score, the greater your chances of obtaining approval for a higher credit limit on credit cards. If lenders find your creditworthiness track record suitable, they will be interested in lending you more money.
Why Maintain a Good CIBIL Score?
Today, the term “CIBIL score” is synonymous with “credit score” and majority banks and financial entities across India verify a loan or credit card applicants’ credit history via their CIBIL score.
There are multiple benefits of a good CIBIL score. These include:
- Banks will remain ready to advance you loans at the earliest
- Lenders will demand fewer documents from you
- You will not be asked to find guarantors for your loan, which can be a hassle
- As a low-risk customer, you may even be offered a lower rate of interest
- The processing fees could be reduced or even waived off
- Financial institutions will be willing to offer you higher borrowing limits
- Many employers now check credit scores as part of their background check. Having a strong score will ensure you are not rejected
How Can You Strengthen Your Credit Score?
A robust credit score would fall anywhere between 750 and 900. It is possible to have a score of 900 if your credit history is excellent. A high score shows you are a responsible borrower.
Through CIBIL, lending agencies can now access your data that is even 15 or 20 years old. Maintaining old credit cards and utilizing them periodically will strengthen your credit history and ensure a healthy credit score.
If you plan to take a credit card or avail a loan, ensure that you make all payments on time.
Even if you are a good customer but do not have sufficient borrowing history, it can make lenders wary of your application. Therefore, when you take loans or use credit cards, repaying your monthly repayment instalments (EMIs) on time is a prerequisite in building a good credit history. EMIs refer to the equated monthly instalment you pay for any loan.
In a nutshell, a good credit score can offer you monetary savings and other benefits, including easy availability of credit cards and various types of loans on your most favourable terms and conditions.
