Are you thinking of borrowing a loan for your house repair, or buying a new car, or any property that you wished to own for a long time? Do you have an adequate credit score for the approval of the loan? Are you aware of the benefits of a good credit score? Let’s have a quick look at what is the credit score and how it will aid you in getting a hassle-free loan.
A credit score is a numerical value that signifies the financial worthiness of an individual. The credit score calculation is carried out on the basis of credit report sourced from credit bureaus. That include past loans, EMIs and dues of the individual opting for the loan. In India, there are four credit bureaus licensed by the Reserve Bank of India (RBI) including the Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax and CRIF High Mark.
Why Is Credit Score Important?
Before lending money, banks and financial institutions evaluate the creditworthiness of the borrower to calculate the amount of risk it poses to lend the money. The credit report along with the credit score come handy for lenders in that case. It enables lenders to quickly assess the qualification of a borrower for the loan, interest rates, and credit limit.
Besides banks, organizations like insurance companies, landlords, mobile phone & electronic sellers, and other digital finance companies also use credit scores for calculating the creditworthiness of borrowers.
How Is The Credit Score Calculated?
CIBIL is the most widely used credit score in India, let’s have a look at how it is calculated. The CIBIL score ranges from 300 to 900. Here are some key pointers of CIBIL score:
If someone doesn’t have a credit history, his/her score is -1.
If the credit history is under six-months of duration, the score will be 0.
CIBIL usually takes 18 to 36 months of time for a proper scoring.
In general, the CIBIL score above 750 is considered satisfactory.
Which Factors Affect the Credit Score?
Although various credit bureaus use different calculation mechanisms, there are four primary factors that all of them consider while calculating the credit score. These factors are:
● Credit History: Your past track record of EMI repayment covers around 30% of the weightage while calculating the CIBIL score. Various financial institutions keep in touch with CIBIL to track the payment records of individuals. Credit history, in general, tracks the records of the past 3 years.
● Credit Utilization: It is calculated by dividing your current outstanding loan by your available limit. It has a 25% weightage in the CIBIL score calculation.
● Credit Mix: There are two types of loans in any portfolio: secured and unsecured. Try to keep your unsecured loans in control as it has a negative impact on your credit score. It has a 25% weightage in CIBIL calculation.
● Other Factors: Besides the above three, the number of credit applications filed in the recent past, the loan applications that have been rejected, and rejections by other banks covers the rest 20% of the CIBIL score.
How To Get A Free Credit Score Report?
The Reserve Bank of India (RBI) directed in 2017 that all the credit bureaus should offer one free credit report to consumers annually. As mentioned above, there are a total of four credit bureaus in India, so you can get four credit reports in a year by subscribing to them. Notably, the credit report also contains your credit score.
How To Maintain A Good Credit Score?
● Timely payment of bills or EMIs.
● Don’t be a defaulter on your loans and credit cards.
● Ensure a low credit usage ratio.
● Don’t go haywire with your credit inquiries.
● Avoid multiple loans at the same time.
● Maintain a balance of secured and unsecured loans.
● Establish a healthy relationship with financial institutions.
● Keep a check on your credit report and credit score regularly.
● Old credit cards are a sign of good credit history, don’t lose out on them.
Benefits Of High Credit Score:
Individuals with a healthy credit score have 79% of higher loan approval probability. There are a bunch of other benefits as well, which include:
● Easy Availability Of Loans: A good credit score suggests that you have been paying all your EMIs on time. A high credit score is similar to those blue chips that you can cash whenever you are in need. Besides, it also assures your creditors that there is a low chance of you to turn out to be a defaulter.
● Higher Credit Limit: If you have high credit scores, you can negotiate with the creditor easily and can get higher loan amounts. On the other hand, a low credit score signifies that you have not been able to handle credit well.
● Lower ROI: Along with higher credit limits, a good credit score lets you get loans at lower interest rates. Banks or any other crediting agency might offer discounts on your interest rates looking at your repayments history.
● Faster Approvals: Do you know that several lenders offer a pre-approved loan for customers with healthy credit scores and lengthy credit history! This is one of the most significant advantages of a high credit score; the need for money can arise anytime, and you can avoid the waiting time with a higher credit score.
● Adds An Extra Mark On Visa Applications: Many foreign countries like the USA and the UK ask for your credit and income tax history while applying for Visa. You can secure an additional point by keeping your credit score intact.
● Be Future-ready: We all need extra cash now or then, you might not require credit or loan in the near future, but you don’t know how the future might turn out. A good credit score is like a piggy bank, where you deposit a small amount of money on a regular basis and can withdraw a substantial amount at the time of exigency .
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