A credit score indicates your credibility. A higher credit score shows a better potential to repay loans and credit card bills. Moreover, it even allows you to get faster loan approvals at a cheaper rate of interest. However, a lower credit score lowers your chances of getting a loan and credit card approved. Discussed here is a detailed guide on credit scores.
What’s a credit score?
A credit score is a measure of your credibility. In simpler words, it means your potential to repay the borrowed money. It is a 3-digit representation that ranges anywhere between 300 and 900, wherein a credit score closer to 900 indicates a good score. Having a good score can assist you in getting your credit cards, and loans approved faster. Moreover, it can assist you in getting the loan at a cheaper rate of interest at a higher loan proceed, or you can select a better repayment tenure to repay the loan proceed. Your computation of credit score is done after factoring in various parameters. A few of them are your credit balance, repayment tenure, new credits, credit utilization, credit mix, credit enquiries and repayment history.
Major credit companies like CIBIL, Equifax, Experian and CRIF Highmark calculate your score. The RBI (Reserve Bank of India) has mandated all the banks to pass on transactions linked to computing credit scores to these 4 companies. These companies compute the credit score basis the data provided and make a completely detailed credit report. The report is just like a report card, with the only difference being that it’s a financial representation of your credit score. For all lenders, whether BOI, Axis, ICICI or HDFC CIBIL score check is an important parameter to determine your eligibility.
What’s the impact on credit score?
The credit score of an individual is based on different parameters. Basically, it reflects your credit behaviour. This involves your credit repayment history, a mix of unsecured and secured credit, frequency of credit card or loan application, etc. Listed here are a few of the important parameters that have an impact on your credit score –
Repayment history –
Repayment history is your behaviour with credit in the past. Repaying your dues and loan bills on time helps increase your credit score. Missing any repayment will negatively impact your credit score and your potential to secure a loan or credit card in the upcoming times.
Credit utilization ratio –
The credit utilization ratio (CUR) is the overall credit amount availed by the credit limit available. A high ratio shows a high repayment burden, which has a negative bearing on your credit score. On the contrary, a low CUR (credit utilization ratio) of 30 per cent or less shows high credibility to the lender. Also, having a high credit score allows you to qualify for additional credit easily. Note that whether it is Axis or HDFC home loan, a CIBIL score is important to qualify for the home loan. Your CUR is also one of the parameters that are checked by your lender.
Simultaneous loan and credit card applications –
Generally, new credit card or loan applications trigger enquiries from lenders. Also, such enquiries by lenders or issuers show up on your credit report. This, in turn, has a negative impact on your credit score. Thus, ensure not to make multiple hard enquiries as it hurts your credit score.
Also Check: HDFC home loan CIBIL score
Mix of credit
Having the correct mix of unsecured and secured loans is an excellent practice. For instance, having a lot of unsecured debt like outstanding personal loans or credit card bills has a negative impact on your credit score. Having a high unsecured debt shows you have mismanaged personal finance. Hence, it is good to hold a good mix of secured loans like loans against property, home loans, gold loans, car loans, mortgage loans and business loans, along with a few unsecured loans like credit card debt or student loans. This helps you maintain a strong credit score and even enhances the chances of availing of new credit.
Frequently enhancing credit card limit
Frequently requesting an increase in credit limit would lead to a lot of hard enquiries. The greater the number of hard enquiries, the more adverse will be the impact on your credit score and report. The potential lender might also perceive that you have a high chance of defaulting your repayments in the future.
Credit reporting error
The wrong information in the report will impact your credit score. For instance, incorrect default information, mistakes in personal details, credit cards or loans assigned, etc. Also, inaccurate or delayed reporting by the banks may even hurt your credit score.
No credit history
Credit history is determined based on your credit behaviour, repayment history, credit utilization limit, etc. Having zero credit history can have a negative impact because the lender does not have any proof to decide as well as estimate the involvement of risk of non-repayment.
Unable to meet the loan guarantor role
As a loan guarantor, if you are not able to meet the liability of the primary borrower’s default, then your credit score may also be negatively impacted. In simpler words, if the primary borrower is unable to meet the loan obligation, and if the loan guarantor even fails to repay, then your credit score will be reduced.
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Credit score range & how to interpret this range?
Your credit score ranges anywhere between 300 and 900, and you must make sure your credit score is nearer to 900. This will make sure you get an excellent deal on your credit cards and loans. Understanding credit scores and then interpreting the same can help in availing of a loan quickly. Listed below is the meaning of each range –
|No history (NH) / not applicable (NA)||No credit history|
|750 – 900||Excellent|
|650 – 749||Fair|
|550 – 649||Average|
|300 – 549||Defaulted payments|
If your credit report reads NH or NA, it means you have no credit score. You can build your credit score by availing of a credit card and using it as per your requirement. Ensure to always repay your credit card dues on time by the due date to increase your credit score.