About Credit Score

What is a Cibil / Credit Score?

As the name suggests, it is a three‐digit number that measures a person’s capability to repay the borrowed amount to the lender. It is a measure of one’s creditworthiness that the credit bureaus assign. These bureaus are agencies that gather and analyse the financial transactions data of an individual or a business to arrive at his credit score or cibil score. Be it your default history, financial prudence or repayment behaviour, everything is reflected in this score.

This data can include previous loans you have taken, credit card transactions, overdraft facility usage, payment of utility bills etc. The famous credit bureaus in India are TransUnion CIBIL (Credit Information Bureau India Limited), Experian, CRIF, and Equifax. So, if you have this question in mind, how can I check my credit score? Well, now you have the answer to it.

A low credit score / cibil score is one of the primary reasons behind loan applications getting rejected in India. This score is given high importance by lenders since rising NPAs have been a problem faced by these lenders for a few years. This score tells about a borrower’s repayment behaviour giving information to the lenders about how creditworthy he is as a borrower. Whether the lenders can rely on you by lending their money or not is the consideration here.

They can also assess the capacity of the borrower to repay the loan and determine the interest rate to be charged to a borrower. In addition, there are online portals where you can check your credit score online or approach any credit bureau and ask for your credit report. Both individuals and businesses need to check their credit score before applying business loan or retail loan

Credit / Cibil Score Range and What it Means?

Now that it is clear that this is a three‐digit number, let’s classify this to understand better how lenders see this number. The credit / cibil score of any individual or company lies somewhere in the range of 300 to 900, where 300 is the lowest possible credit score, and 900 is the highest possible score. A person or company with a score of 300 to 400 is less likely to get a new loan. But a person or company with a score in the range of 800 will get the loan in all likelihood. Check your credit score or cibil score online to see where you stand. Let’s classify these scores:

  • Ideal Borrowers:

    • The borrowing company with a credit score or cibil score of 750 and above falls under this category. This category consists of borrowers who have an excellent credit history of repayment in the past. In addition, they possess the highest level of exemplary financial behaviour and can be trusted by lenders. Thus, do a free credit / cibil score check online before applying for a loan, and if your score is above 750, you can negotiate better terms on your loan.

  • Standard Borrowers:

    • If an individual or a borrowing company has a credit score that lies in the range of 600 to 750, then they have decent chances of getting a small‐ticket loan. Some element of credit risk for the lender is there, but the chances of the loan going bad are less. The score in this range could also reflect a good borrower who might have missed a few EMI deadlines in the past, has missed filing ITR or has too much debt already. As a precautionary measure, say to yourself: check my credit score before applying for a loan just to be sure.

  • Risky Borrowers:

    • Most lenders choose not to lend to borrowers with a score below 500. This is where there are high chances of loan applications getting rejected. Also, there are chances of credit score going further down on application rejection. Thus, if any borrower has missed multiple repayment deadlines in the past, you may fall under this category of risky borrowers. Therefore, it becomes imperative for these borrowers to undergo a credit score check before applying for a loan anywhere. These borrowers need to improve their credit profile and then apply for a loan.

Why Should You Check Cibil / Credit Score?

There are many reasons to keep an eye on your credit / credit score:

  • To Get Better Terms and Conditions on Loans and Credit Cards:

    • You can negotiate better terms and conditions with the lender owing to a high credit score. If you check your credit / cibil score often, then you know where you stand. The better the credit score, the more exciting deals on credit cards and additional loans you will get.

  • To Know Whether You Should Apply for a Loan or Not:

    • If you are planning to take a loan, make sure to undergo a free credit score check to decide whether you should apply for it or not. With a credit score of less than 550, it makes sense to wait for improving your credit score first and then apply. Otherwise, applying for a loan and then application getting rejected will further weaken your chances of getting a loan from another lender.

  • To Rectify Inaccurate Information:

    • You should ideally check credit score online regularly to identify any irregularities or false information. Then, you can bring that information to the responsible authority’s knowledge. Check for all the necessary information is present there or not and also verify its integrity. There is a possibility that inaccurate information is the reason for a substandard credit score. So, now, if your friend or colleague asks you, “Why is my credit score so low?” advise him to check for any inconsistencies in their credit report.

What Affects Your Credit / Cibil Score?

Your credit score keeps on changing regularly, and just like stock prices, it either goes up or falls depending on a plethora of reasons. These reasons are listed below:

  • Repayment Habits:

    • If you’re asking yourself when I should check my credit score, it tends to go down every time? One of the key reasons may be that you are missing the repayment deadlines on your existing debt. It could also be due to a delay towards payment of your credit card bill. Going by a CIBIL report, a delay of 30 days in repaying your EMI can bring down your credit score by 100 points.

  • Payment of Minimum Amount towards Credit Card Bill:

    • Another reason affecting your credit score might be paying only the bare minimum of the principal amount towards your credit card bill. If you are a borrower who believes in revolving credit and its benefits, then it is probably time to think about its ramifications as well. This can further lower a borrower's credit score going forward.

  • Multiple Loan Applications:

    • If you have applied for a personal or business loan with multiple lenders simultaneously, it will reflect in your credit report. It affects your credit score when lenders perform a credit check on your loan application. Multiple applications show desperation, and if one or a few of them are rejected, it negatively affects your credit profile. You can confirm this by going for a free credit score check after the rejection of your loan application.

  • Homogeneous Debt:

    • Even if you are running multiple loans, make sure to mix these loans. Avail a loan as per your requirement: a secured loan, an unsecured loan, then a car loan, a home loan, credit card etc. If a borrower holds multiple personal loans or multiple credit cards, it affects his credit score. Check your credit score online and see for yourself.

How is Credit / Cibil Score Calculated?

Credit bureaus like TransUnion CIBIL, Experian, Equifax, CRIF are only allowed to calculate the credit score of borrowers. Several factors in the likes of one’s credit history, credit type, repayment habits, credit exposure, age of credit, and credit utilisation are considered while computing a borrower’s credit score. The next time you are doing a free credit score check, keep these factors in mind. However, the priority varies of these factors in the calculation, for instance:

High Priority

Medium Priority

Low Priority

Repayment History

Age of Credit

Homogeneity of Debt

Credit Utilisation Ratio

Credit Exposure

Lender’s Inquiry

The method of calculation and weightage of these factors might be different for different credit bureaus. However, the factors considered and credit score largely remain the same.

Benefits of a Good Credit Score

There are a plethora of benefits when you have an excellent credit score, they are:

  • Quick Sanction of Loans:

    • Your credit profile is checked by lenders every time you apply for a new loan. If you have a good credit score, the credit risk in lending to you is comparatively lower. Thus, your loan application will be accepted easily, and the loan will be sanctioned quickly. Therefore, ensure to check credit score before applying for a loan for quick approval.

  • Better T&Cs on Loan:

    • Now that you are a credible borrower with an excellent credit record, you can sit with the lenders and negotiate better terms and conditions on your loan. Ask for a lower rate of interest on the loan with flexible tenor and repayment terms. Thus, it is advisable to do a free credit score check before applying business loan.

  • Lucrative Credit Card Deals:

    • We all need credit cards at some point in time, and the application gets rejected many times citing poor credit history. Another benefit of an excellent credit score is you will get all the exciting deals with your credit card.

Drawbacks of Sub‐Standard Credit Score

There are many drawbacks of having a sub‐standard credit score mentioned as follows:

  • Higher Interest Rates:

    • Lenders charge you a higher interest rate on loan since the risk in lending to you is higher. Thus, you end up paying much more on the same loan compared to a borrower with a good credit score.

  • Loan Application Rejection:

    • Another demerit of poor credit score is loan application being rejected by the lender. This will further exacerbate your score. Do a credit score check before and after the loan application rejection to see the difference.

  • No Credit Cards:

    • Banks look for your credit score before giving you a credit card since they can’t risk giving a credit card to a borrower with a default history. Thus, if you like updating to newer credit cards, start improving your credit score.

Credit Score FAQ

  • How can I improve my credit score?

    • There are a few ways through which you can improve your credit score.

    • Pay off all your small loans at once to have less debt.

    • Timely payment of all instalments of your loan and credit cards

    • Not apply for a loan with multiple lenders when you have poor credit scores

    • Rectify errors, if any, in your credit profile etc.

  • What is usually considered a decent credit score in India?

    • It tends to vary slightly from one credit bureau to another. However, a decent credit score is usually in the range of 650 to 750.

  • What information is there in my credit profile?

    • Apart from credit score, the information printed on your credit profile is your details (name, address, phone number etc.), your credit history, PAN card details, number of loans and their types, credit cards, repayment patterns, lender’s inquiry details etc.

  • If I check my credit score frequently, then does it also affect my score?

    • No, usually, if you do a credit score check regularly, it does not affect your credit score in any way. It happens while you apply for a credit card or a loan.

  • If I own multiple credit cards, will this affect my credit score?

    • There is no one‐size fit all answer to that since it depends on your credit history. For example, if you own several credit cards having higher than usual limits, and you either exhaust all those limits or don’t use them at all, then your credit score might get affected.

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