What is a Credit Score?
The credit score is exactly what it sounds like. It determines how credit-worthy you are,i.e, it determines if you can be given money on credit. It is a number that ranges from 300-900. The higher the score, the higher the chances of you landing a credit or loan. It essentially makes you a better candidate to lend money to.
Credit Score in India
The Reserve Bank of India has given the license to track credit information to four companies- CIBIL, Experian, Equifax, and Highmark. But the Credit Information Bureau India Limited (CIBIL) is the most trusted and popular out of the four. Therefore the CIBIL score is used by everyone to determine your credit score.
The CIBIL credit score is basically a three-digit number, as explained earlier. This score ranges from 300 to 900. Individuals with no credit history will have a score of -1. If your credit history is less than six months, the score will be 0. A CIBIL credit score takes time to build up and usually, it takes between 18 and 36 months or more of credit usage to obtain a good credit score. Usually, a number above 700 is considered a very good score.
Why is the Credit Score Important?
Our credit score is extremely important. It is more than just a number, it is a crucial financial tool. It doesn’t just determine our ability to obtain loans when we need it, It also determines several other things whose significance may not make sense to you at the moment. But it definitely pays off in the long run.
Here are a few benefits of having a good credit score:
- Easy loans: The obvious benefit is that it is easier to get approval on the loans you may seek. It could be any type of loan. It tells the lenders that you are capable of paying them back on time.
- Lower interest rates: The lenders take into consideration your credit score when they determine your interest rates. The higher your score, the lower your rates.
- Higher limits on loans: The better your score the more amount of money you can avail as loans. If your credit score is low, they may be afraid to lend more money to you.
- More negotiation power: With a good score on your hand, you have more authority to negotiate on your interest rates and loan amounts. The banks tend to agree on if you can show proof that you are capable of paying them back on time.
- The credit card offers: If you own a credit card, and have a good credit score as well, then you are bound to get many exciting offers! They offer higher credit limits, more privileges, coupons, and even cash back offers!
Factors that Affect the Credit Score
In order to figure out how to maintain a good credit score, it is important to know the factors that determine it. In India, these are the factors taken into consideration:
- Credit History: One’s ability to repay debts, i.e., timely repayment of loans, EMI’s, etc. This has the most weightage ( 30%) while calculating your score.
- Credit mix and duration: The number of credit cards and loans you take adds up to about 25% of your CIBIL score.
- Credit exposure: The number of times you may resort to the extension of loan repayment, add to about 25% of the credit score.
- Other factors: The rest 20% is attributed to other related factors.
Tips to Maintain a Good Credit Score
To maintain a good credit score, it is important to keep in mind the above-mentioned factors. Anything that impacts them negatively is bound to have a negative effect on your credit score.
However, here are a few inside tips to follow to ensure you do not contribute to it negatively:
1. Pay your bills on time
This is the most important thing to remember when you are trying to maintain a healthy credit score. This is the factor that contributes maximum to your score. Every delayed loan payment, or credit card bill is a few points off your credit score.
Tip: You can use tools like CRED that reward you for paying your bills on time. This tool will incorporate good behavior for paying your bills on time.
2. Don’t max out your credit cards
Just because you have a limit on your credit card, it doesn’t mean that you have to take maximum advantage of it. Those who use up all of their credit limits are often seen as a risk by lenders, hence it lowers your credit score. The amount of credit you used against the total credit availed is called credit utilization. 40% is the ideal percentage of credit you must use out of your total credit availability, to keep your score up.
Tip: Tracking and Managing your expenses can prevent you from maxing out on your credit cards.
3. Close your old loans by making Timely Payments:
Your loans are part of your credit history. Sometimes you are offered the choice to pay off the loan in a one-time settlement. This amount is usually lower than the amount you might owe. But this is considered a loss for the lender. Hence it lowers your credit score when you “settle” the loan. On the other hand, if you close the loan, by making timely payments it reflects positively on your CIBIL score.
4. Don’t ignore your credit reports
Always check your credit report for errors. There could be a mistaken default on a loan recorded or other wrong information. It could lead to complications later on. Thus, always check your reports regularly. If there are any errors, you can log on to the credit bureau’s website and seek to make the changes.
Tip: Set aside time every month to review your credit card statement. This habit will also help you to manage your expenses by noticing your spending behavior.
5. Don’t avoid credit altogether
A very common mistake we all make is to avoid or fear debts! Though it might be a bit intimidating, it is important to earn a good credit score. Having no credit history is bad for your credit score. Unless you are sure that you will never have to take a loan in the future, it is advisable to try and earn a good credit score. It comes in handy in your future. However, if you have no credit score, the lenders look at factors such as income and employment before lending.
Other tips for a Better Credit Score:
There are other small things you can keep in mind to maintain a healthy credit score.
- Remember that increasing credit card limits frequently has a negative impact on your credit score. The lenders usually view this as a risky sign, as the borrower might be dependent on credit to manage their finances.
- Also, another tip is not to close your old credit card accounts. You may not use it, but it is advantageous to keep it as it still accounts as part of your total credit availed. It will, therefore, reduce your credit utilization percentage, which in turn increases your credit score.
- Last but not least, don’t overuse credit. Don’t open new credit card accounts all the time, or avail too many loans. This not only drives down your credit score but also adds to your liabilities.