What is credit score?
If you have ever applied for a loan or any other credit facility, then ‘credit score’ is a very common term for you. Just like income range and job stability, credit score is also a crucial factor checked by bank managers to evaluate a loan application.
It provides a glimpse of an individual’s financial situation at a specific time. In simple terms, a credit score acts as a window that opens up numerous financial opportunities for you. That’s why having knowledge about credit score is very essential for everyone.
In this article, we have explained this topic in the simplest way possible. So, let’s start with the basics of credit scores.
What does a credit score mean?
Typically, credit score is a 3-digit numerical representation of an individual’s creditworthiness, having a range between 300- 900. It is just like a scorecard of your credit behaviour and financial discipline.
If you manage your debt responsibly, automatically your credit score will be high; on the other hand, if you’re a loan defaulter, simultaneously, it will also reflect on your credit score. Moreover, credit score is a statistic that determines your ability to repay a loan and the likelihood of default.
Well now, you have a basic idea about credit score. But do you know how credit score works? How do credit bureaus get your credit details? Let’s explore further…
How does credit scoring work?
In India, there are four major credit bureaus that determine the credit score for each individual borrower: TransUnion CIBIL, Experian, CRIF Highmark and Equifax. All these credit bureaus are regulated by the Reserve Bank of India under the section of Credit Information Company Regulation Act (CICRA), of 2005.
According to this act, when you avail of a loan or any other credit facility from any financial institute (such as PSU Banks, Private lenders, NBFCs and other financial institutes), they report the particular loan account to all four credit bureaus.
Not only the loan account, when you start to serve the loan interest, they also share its repayment records with credit bureaus on a regular basis. Now, based on your loan repayment history, and current credit activity, each credit bureau evaluates a unique credit score for you.
On a large scale, Credit Bureaus collect and maintain these credit information for millions of borrowers and help lending institutes to make their lending decisions.
That means, when you again apply for a new credit facility, the bank manager retrieves your credit score from any of these credit bureaus for the purpose of credit risk assessment.
Ultimately, the credit score helps them to decide, whether they approve the loan application or not; If yes, then what interest they will offer, what will be the loan term and so on.
Are there different kinds of credit scores in India?
Yes, all four major credit bureaus in India generate separate credit scores for each individual customer using their own credit scoring model (a mathematical calculation based on various credit factors). That’s why your credit scores may differ across credit bureaus, even though they are based on the same credit data.
Among these credit scores, the CIBIL Score is the most popular and widely used by bank managers. The CIBIL score is produced by TransUnion CIBIL, the pioneer in the credit bureau industry since 2000. Later, the other credit bureaus were established, generating their own credit scores: Experian Credit Score, Equifax Score, and CRIF Highmark Credit Score.
What is a good credit score?
When it comes to credit score, there is no magic number that guarantees loan approval. Your credit score is calculated based on several key factors, such as loan repayment history, credit utilization, types of credit, depth of credit, length of credit history, and recent credit activities, etc.
While a score above 750 is considered excellent and makes you a highly desirable borrower in the lenders’ perspective. A score between 700 and 749 is generally sufficient to secure a loan from private banks and NBFCs.
If your credit score falls within the 650–699 range, you may still qualify for a secured loan, but likely at a higher interest rate.
However, always remember that the definition of a “good” credit score may vary between different credit bureaus, as each follows its own internal credit scoring model.
Importance of credit score:
There are several advantages of having a healthy credit score, whether securing a loan with the best deal, getting a job or promotion in a reputed company or financial sector, and so on.
• Better chance of getting loan approval:
When you apply for a loan, lenders assess your credit score in the initial stage. A good credit score increases your chances of loan approval, leading to faster and hassle-free approval. This helps you meet your financial needs, especially in emergencies.
• Lower interest rate on loans:
With a good credit score, you can also secure a loan at a lower interest rate. Even a slight reduction in the interest rate can lower your monthly EMI burden and significantly reduce the total cost of the loan.
• More negotiating power:
If you have a high credit score, bank managers are unlikely to want to lose such a valuable customer. This gives you greater negotiating power, allowing you to secure better interest rates and more favourable terms and conditions.
• Better chance of approval for higher amount:
A larger loan amount comes with a higher risk for lenders, especially in the case of unsecured loans. In such situations, bank managers prefer customers with an excellent credit history. Therefore, maintaining a strong credit score is essential to take advantage of these opportunities.
How do I get a credit score?
As a responsible borrower, you should regularly check your credit score to monitor your financial health and make informed decisions. Keeping track of your score helps you to understand your current credit position and take necessary steps to improve it if needed.
As an Indian citizen, you are entitled to one free credit report annually from each of the four credit bureaus. To get your free credit score, follow these steps:
- Visit the official websites of all four credit bureaus (TransUnion CIBIL/ Experian India/ Equifax India/CRIF Highmark).
- Look for the option to “Get Your Free Credit Score.”
- Register with your KYC details.
- Access your free annual credit score and report.
Suggested article:
- How to correct CIBIL report?
- How to remove Settled loan from CIBIL report?