Credit score is a numeric representation of the repayment history.
Every application for any credit facility (loans or credit cards), the lender checks your Credit score and your credit history. The application is further processed on the basis of the score and the credit history.
How is credit score calculated?
The member banks and financial institutions monthly report the details related to credit activity of the customers to the bureaus. This includes data of each loan or credit card repayment made by the customer during the period and even the late or skipped payments. The report comprises of new loan applications, interest rate, credit limit on card, the status of all loan accounts including those ‘written-off’ or ‘settled’ or ‘closed’. After the complex statistical analysis of the provided information credit score is calculated. If credit payment is done on time then the score is good. The candidates with high credit score have the better chances of getting a loan or credit card.
What are the most important parameters on which Credit Score is determined?
Credit Score is determined based on multiple factors, below are the five key factors:
- Payment History
- The lender wants to know if you have paid past dues on time. This is one of the most important factors in the Credit Score.
- Credit Utilization
- Credit Utilization is the ratio of the amount of the credit utilized by you compared to the credit available to you.
- Credit Age
- Age of all the accounts held, is considered
- Account Mix
- Mix of the types of accounts held.
- Credit Inquiries
- When applying for credit, lenders will check your credit score (credit inquiry) which will impact your credit score. Hence, one has to be very careful while applying for a credit facility with multiple banks/ lenders as this is the first check the lenders carry out.
What is a good credit score?
We have divided the range in four categories below:
| POOR |
FAIR |
GOOD |
EXCELLENT |
| 300-640 |
640-680 |
680-720 |
720-850 |
What can hurt your credit score?
- Late Payments
- Loan Default
- Collections
- Hard Enquiries
What can hurt your credit score?
- Paying Debt
- Good Debt
- Increasing Credit Limit
What are the contents of a Credit report?
Credit report is a single unified document that contains credit history across different lenders over a significant period of time. It is a comprehensive report that provides details of an individual’s or corporate entity’s borrowing history and repayment record. The report includes the following information:
- Personal details of an applicant (name, age, gender and address)
- Employment details and earnings
- Number of hard enquiries made by potential lenders on receipt of the loan/credit card application
- Record of previous and current loans along with the payment record
- Any defaults on loan
- The details of settled loans, if any
- Total credit limit and the amount spent monthly (Credit Utilisation Ratio)
- Any credit card payment defaults
- Credit score
- This report provides lenders the detailed information of the applicant’s creditworthiness on the basis of previous and current credit behaviour. Based on the report, lenders take the lending decision.
What is the importance of good Credit score?
- A good credit score makes a person eligible for better deals on loans and credit cards.
- Increases eligibility for loans: Credit score is the numeric representation of payment history. If you have a good credit score, the lender will be interested in giving a loan to you.
- Gives access to best Credit Cards: Some of the great credit cards require a specific credit score which will be accessible to you only if you have a good credit score.
- Authenticity for a lower rate of interest - Especially in the case of loans, those having a positive payment history and credit score are more likely to get a lower rate on loans in addition to their present repayment capacity.
- How to build a credit history?
- Simply take a credit card. The moment you start using a credit card or paying EMIs, your credit history will build up and so will your credit score. This will make you eligible for better options in the future.
