Credit Score

If you are looking to apply for a loan or are seeking a credit card, you should know your credit score. A credit score is important as it represents your financial health and helps banks and Non-banking financial companies (NBFC) to understand your repayment capacity. Your credit score makes it easier for them to approve a loan or credit credit applications in a more seamless way.  But what is a credit score? How can you check and improve it?  Here’s everything you need to know about credit scores.

What is a Credit Score?

A credit score is a three digit number between the range of 300-900. It is issued by the four credit reporting agencies in India viz; TransUnion CIBIL, CRIF High Mark Credit Information Services Pvt. Ltd., Experian Credit Information Co. of India Pvt. Ltd and Equifax Credit Information Services Pvt. Ltd. All these credit bureaus are regulated by the Reserve Bank of India (RBI). Each credit bureau uses their proprietary algorithm to calculate a credit score depending on several factors.  A credit score of 750 and above is considered as ideal.

Generally, credit scores are calculated after taking into consideration 6 months of your financial data. This data includes your outstanding debt, duration of your credit history, payment history, credit exposure, type of loan accounts and more.

Why is your Credit Score Important?

Credit Score might just seem a number, but it actually determines your financial health and capability with regard to loans and repayments. A higher credit score suggests good credit history and responsible repayment behavior. Quick loan approvals, new credit cards, low interest rate credit cards, home loans and car loans, approval for higher credit limits are some of the advantages of a healthy credit score.

How to check your Credit Score?

According to the mandate from the Reserve Bank of India in 2017, all the credit bureaus in India have to offer one credit report to their customers free of cost. Moreover, you can also check your credit score from the BankBazaar Mobile App for free. The app is available as a free download from the Google Play Store (Android) and Apple App Store (iPhone). This app offers free Experian credit score and you can check it several times without paying any fees. You will have to open the BankBazaar app and select the credit score option from the home page. After adding all your personal details like PAN number, name, type of employment, mobile number and so on, you will get your credit score in detail. A free credit report from the BankBazaar app has all the details and also contains analysis of your credit score. This analysis is done by experts which is another unique feature of the app. Furthermore, the BankBazaar app also offers periodic reminders about your credit score so you can keep an eye on your credit behavior more often.

Your credit score does not get affected if you check it regularly. This enquiry is known as soft enquiry and does not have a negative impact on your credit score. Meanwhile, when an enquiry is made by banks, it is called as a hard enquiry and this can reduce your score to some extent.

What are the factors affecting Credit Score?

In order to get a loan approval at an attractive interest rate, you must have a high credit score. However, there are several factors that can affect your credit score. Let’s take a look at them in detail:

  1. Your repayment history: If you have paid all your bills and loan payments on time, it will help you maintain a high credit score. Your repayment history is one of the most important factors in your credit score as it accounts for around 30% of your credit score.
  2. Length of your credit history: Another important factor is the length of your credit history. A long credit history gives lenders and banks a better opportunity to check your repayment activity and financial health.
  3. Not using credit cards: Less or no credit transactions shows an individual’s credit file as inactive. This reduces the credit score of the individual.
  4. A total number of hard enquiries: As mentioned earlier, hard enquiries have an adverse effect on your credit score. If you have several hard inquiries without any loan approvals, it suggests that you have approached various lenders in need of credit.

How to improve your credit score?

A credit score below 750 suggests that you have delayed your bill payments in the past. There are several simple ways that will help you improve your credit score. Let’s take a detailed look at them:

  • Using several credit card for purchase: Make sure you are using a mix of credit cards for making a purchase. It is better to use a different credit card for a different purpose.
  • Monitor your credit score: Checking your credit score regularly will help you spot and rectify an error at the earliest. You can even apply for subscription-based credit report that will give you an access to your credit score more often instead of longer intervals.
  • Timely bill payments: Paying your bills and debts on time is extremely important as it helps to boost your credit score. Avoid delaying payments and ensure to pay your credit card bills and home loan EMIs on time for a higher credit score.
  • Lower credit utilization ratio: Always try to maintain a low credit utilization ratio. The utilization amount should be practically lower than the credit limit of a card. A high credit use ratio has a high impact on your credit score. Higher credit utilization ratio shows that you are overusing your money and will not be able to pay back the balance amount.
  • Increase your credit limit: It is advised to increase the credit limit on your card and use a lower amount to boost your credit score.
  • Do not close old accounts: Credit cards with good repayment history have a positive impact on your credit score. It suggests a good repayment behavior. The sudden closing of such credit card accounts that posses a decent credit history adversely affects your credit score.

There are several myths about credit score that are out there. Hope, all the above information will help you get started on building on your credit score. Having a good credit history is not challenging but it surely is a gradual process. Remember the aforementioned tips to improve and have a decent credit history that will eventually lead to a high credit score. China’s social credit system had blocked more than 11.14 million flights and 4.25 million high-speed train trips by the end of April. Find the best guide on how to improve credit score easily.