India Markets closed

All you need to know about credit score

Pubali Neogy
Credit score

Every so often, you may have a noticed a mail pop up in your inbox asking you to get your credit score or to improve it with the tips provided. But before hitting the delete option the next time, mistaking it another of those promotional mails, you might as well take a look at it. For when you need a loan from a bank to buy a house, a car or electronic gadget, a good credit score can come in handy. This is because whenever you apply for a loan, the lender verifies your credit background, reflected in a credit score, to find out if you are a risky candidate or not.

A good credit score can fetch you additional credit cards swiftly as well, besides holding you in good stead when you are seeking insurance cover, a rental property or even a job!

And how? Well, because, it is an indicator of how responsible your credit behaviour is, which also sheds light on your character trait.

What is a credit score exactly?

A credit score is simply a numerical expression of your creditworthiness. What a credit rating is to governments or business entities, a credit score is to individuals. But, while a credit rating is assigned in terms of alphabets (AAA, A++, AA, A+, etc.), a credit score is assigned numerically and is a three digit number ranging between 300 and 900. Those with a score between 700 and 900 are said to have performed well on most parameters in terms of managing credit and goes on to show that they are highly likely to repay outstanding amounts on time.

Banks decide upon the interest rate they charge borrowers based on that score. Needless to add, the higher the score, the lesser the rate.

How is a credit score generated?

A credit score is usually generated by an algorithm by credit bureaus by typically factoring in an individual’s history of payments, amounts outstanding across all cards and loans, length of credit history (how long it took you to repay the loan), types of credit one has availed so far and of course, the new credit. The algorithm is proprietary to the bureau, but the underlying logic may be the same. Various statistical tools and techniques are employed by bureaus worldwide to build the algorithm.

The model used by a company called FICO to calculate a credit score, is the most popular as of now. Three prominent credit card bureaus (they are companies that collect consumer credit information to resell it to other businesses in the form of credit report), namely Experian, Equifax and TransUnion generate this FICO score. These three scores are widely used and although they may be slightly different, overall they are in the same range.

One can avail credit reports for free but have to pay a small fee for a free credit score.

How does one access one’s credit score in India?

In India, the Reserve Bank of India permits the credit bureaus to provide credit scores or ratings based on credit history procured from different member credit institutions and banks. Credit Information Bureau India Limited, popularly known as CIBIL, is India’s main credit information bureau and also the oldest. Other prominent partcipants in India are Equifax, CRIF High Mark and Experian.

In order to receive his or her credit score one has to upload requisite information in the websites of the credit bureaus.

In India you can receive a free full credit report on request once every year, if you have an available credit history. The Reserve Bank of India (RBI) has mandated all credit information agencies to do so since January 2017. With four such companies in India, this means you can get four credit reports for free each year.

How to improve your credit score?

The most important question now – how does one improve the credit score. First, by keeping your credit card balance low (ideally 30 percent of the available credit) with timely repayment and ensuring all other debts are repaid in a timely manner. To improve your score you also need to repay bills (utilities and others) on time. Third, by keeping an old account that has been serviced well, instead of closing it, as the length of credit history indicates just how long you have been able to handle the debt well.