“I never borrowed a single rupee in my life!” We’ve all heard this statement from elders around us, for whom it was a matter of immense pride to have gone through life without ever owing anybody anything. Today, however, if a lender/institution looks at a person’s financial history and finds no loan, they think, “Why has nobody ever lent this person a single rupee?” As crucial as loans are in the current financial climate, there are multiple factors which ensure favourable terms. The most important of these factors is your Credit Score. For the uninitiated, let’s start with what a credit score is:
A credit score is a three-digit number issued by a credit bureau to an individual or corporation. This number ranges from 300-900 and any score lower than 600 is generally considered a low score. A score ranging from 600 – 750 is treated as an average score and a score of 750 and above is deemed to be good. Different established credit bureaus have their own algorithms to determine a credit score. Currently, the four bureaus in India are, TransUnion CIBIL (Credit Information Bureau India Limited), Experian, Equifax and CRIF HighMark. The basic parameters that these bureaus use to determine a score are the same.
Payment History:
How responsible the individual has been in his financial dealing in the past is the first and most important factor that makes up the credit score. Payment history usually has a weightage of 35% in the overall score.
The Amount Owed
The amount of credit an individual has taken to date is the second major factor that contributes to the score. Usually, it affects 30% of the total score.
New Credits
The frequency of a new line of credit being established is also one factor (with 10% weightage) that determines a credit score. But, at the same time, making too many loan inquiries shows that you are in desperate need of funds and may land you in the ‘credit-hungry’ category.
Credit Mix
Having a right blend of secured and unsecured loans, along with a revolving line of credit and fixed credit, has about 10% of importance when it comes to computing your credit score.
Length of Credit History
Older the credit, more the weightage (around 15%). So, it is advisable to not close a credit line, even one that you are no longer using.
The first two parameters are constant and attribute to the same weightage by all the bureaus. The last three may vary by 5%, and hence there can be a difference of 50 points in the final score computed by two different bureaus.
The closer your credit score is to 900, the more confident any credit institution will be, about your ability to repay the loan. As a direct result, the chances of your application getting approved increase. Any score above 750 is considered good. Today, all banks /NBFCs usually, look at a person’s credit score as one of the many checks they perform before approving a loan. A good score proves to a financial institution that you are a responsible payer and will, most probably, not default on your repayment.
According to an RBI mandate, every credit bureau is required to give one free credit report per year to any individual, upon request. A credit report is a document that has detailed information about the individual and their credit score parameters. It contains their score, detailed information on all their credit lines, their payment history, hard inquiries made for any credit, and personal information like PAN card details, permanent address, phone number and more. Since CIBIL was the first bureau that had been established in India, a CIBIL Report is what banks usually prefer.
Armed with the points mentioned above, it will now be easier for you to understand what credit scores and credit reports are. Just remember these simple pointers, and your credit score will never drop below 750!
