What is Credit Score- A Complete Guide

When you apply for a loan or a credit card, the very first thing the lender/card issuer looks at is your credit score. This three-digit number decides your eligibility for the loan/credit card. The reason why financial institutions rely so much on your credit score is, it gives them a good idea of your financial health and creditworthiness- the higher your credit score, the more is the likelihood of your loan/credit card application being approved.

Credit score is an even more important criterion for unsecured loans like personal loans or credit cards since an unsecured loan is granted purely on a good faith basis. Before we discuss the ways to improve the credit score, it is a good idea to first understand the whole concept of credit scores and credit reports.

What is a Credit Score

The credit score of an individual is a three-digit number, typically between 300 and 900, that indicates the person’s creditworthiness. The credit score is calculated on the basis of the person’s credit report which contains the history of all the secured/unsecured loans (including credit cards) the person has availed of in the past. This history of loans- known as credit history- is compiled by independent financial agencies called credit bureaus.

Different countries have different credit bureaus that maintain the credit history of individuals and businesses. In India, the RBI has licensed four credit bureaus, out of which TransUnion CIBIL (formerly, Credit Information Bureau India Limited) is the oldest and the most popular one, so much so that credit score in India is often simply called CIBIL score. Your credit score or CIBIL score is calculated from a report prepared by CIBIL based on your credit history. CIBIL score lies in the range of 300-900. The closer your score is to 900, the more likely it is that your personal loan will be approved.

Credit Bureaus in India

As mentioned above, there are four licenced credit bureaus or credit rating agencies in India- TransUnion CIBIL, Experian, Equifax and CRIF High Mark. Let us now discuss each of the four credit bureaus in detail to get a better understanding-

TransUnion CBIL

It is the oldest and the most popular credit bureau in the country. India’s top banks including SBI, ICICI, Union Bank of India, Bank of Baroda hold a stake in TransUnion CIBIL. Almost all banks and financial institutions check your CIBIL score before approving a loan or credit card.

CIBIL score ranges between 300 and 900- 300 being the lowest and 900 being the highest score. A CIBIL score of 750 or above is considered good and in most cases is enough to get loan/credit card approvals. While it is free to check your CIBIL score along with a detailed credit report once a year, you need to pay for one of the subscription plans for any further enquiries. The three plans offered by CIBIL are-

• Monthly Plan- Rs. 500
• 6 Month Plan- Rs. 800
• 1 Year Plan- Rs. 1,200

Experian

Experian is a multinational credit rating agency based in Ireland. The company operates in 37 countries including India. Experian started its operation in India in 2010 as a credit bureau. Just like CIBIL, Experian also allows you to view your credit report and credit score for free once every year, post which you have to pay Rs. 138 per request for your Experian credit report and Rs. 399 per request for your Experian report along with your Experian score.

Equifax

Equifax is an American multinational credit rating agency. It is one of the largest credit agencies in the world along with Experian and TransUnion. Equifax has been providing financial services in India since as early as 1899, however it was only in 2010 that the company was registered as a credit bureau in the country. Like other credit bureaus, Equifax allows you to view your credit report for free once a year post which you must pay for one of the membership plans- Rs. 150 for one month, Rs. 450 for three months and Rs. 900 for one year.

CRIF High Mark

CRIF High Mark is an Indian credit bureau based out of Mumbai. The compay was incorporated in 2005 and became operational in 2010. As of today, CRIF High Mark provides its services in 50 countries. Just like the other three credit bureaus, it is free to view your CRIF High Mark report and score once in a year, post which a fee of Rs. 99 per request for credit score and Rs. 399 per request for credit score along with credit report is applicable.

Factors Affecting Credit Score

As we shall see later in this article, there are multiple ways to improve your credit score. On similar lines, your credit score might suffer for a number of reasons. For these reasons to make better sense to you, it is imperative to first understand what affects your credit score- positively or negatively. Some of the key factors that affect your credit score are as under-

• Payment HIstory: It is the single most important factor that affects your credit score. Your loan repayment history has a high impact on your credit score. A history of timely loan instalment repayments (including credit card bills) has a positive impact on your credit score, while missing the payment due dates frequently has a negative effect on your credit score.

• Length of Credit History: Age of your credit accounts also impacts your credit score. The older your credit accounts, the better it is for your credit score, provided you maintained a good credit behaviour.

• Credit Enquiries: Whenever you apply for a loan/credit card, the lender/card issuer requests your credit report from the credit bureau. Too many such requests have a negative impact on your credit score.

• Credit Utilisation: If you have a credit card and completely exhaust its credit limit every month, your credit score might suffer. Ideally, you should utilise not more than one-third of your credit limit.

Myths Around Credit Score

Your credit score, as you are now aware, is a three-digit number between 300 and 900 that is a measure of your creditworthiness and is used by banks and financial institutions to determine your eligibility for a loan/credit card.

Despite being a very important metric from the point of view of your financial health, there are many myths around credit score and credit report. Let’s have a look and debunk some of the common myths around credit score-

Having Multiple Credit Cards is Bad for Credit Score : While it is true that too many requests by financial institutions to fetch your credit score/report is bad for your credit profile, having multiple credit cards, unless you apply for all the cards simultaneously, will not have a negative impact on your credit score. Even if you applied for the cards at the same time, your credit score might go down a bit for a short while due to multiple enquiries, it will recover very soon and merely possessing multiple credit cards has no negative effect on your credit score unless you miss your payments.

Credit Score is Not Affected on Paying Just the Minimum Amount Due : This is a very common myth surrounding credit score. Many credit cardholders assume that if they pay only the minimum amount due (usually just 5% of the total credit card bill) by the payment due date, their credit score will not be affected. Nothing can be farther from the truth than this. Unless you pay your credit card bill in full by the payment due date, not only that your credit score will be impacted negatively, the card issuer will also charge you interest on the pending amount. Therefore, it is highly recommended that you clear all your credit card dues by the payment due date.

Credit Score is Affected if You Miss Utility Bill Payments: While it is always advisable to pay all your utility bills like electricity bills, telephone/internet bills, etc. on time, utility bill payments have no effect on your credit score.

Credit Score Depends on Income : This is another very common myth regarding credit score among credit cardholders and credit card applicants. Although credit card companies, along with credit score, do also consider income an important factor for deciding your eligibility for a credit card, your income has no effect on your credit score.

Using Debit Cards Can Improve Credit Score : If your credit card application is rejected and you think that you can build your credit profile by using a debit card, it is simply not going to happen. Unlike credit cards, which essentially entitle you to a loan, debit cards are directly linked to your savings/current bank account. When you make a transaction with your debit card, instead of availing of a loan from the bank, the amount is directly deducted from your bank account. Since no loan is involved, using a debit card has no impact on your credit score. If you want to build your credit profile, you should go for a secured credit card instead.

Viewing Credit Report Affects Credit Score : There are two types of credit score/report enquiries- soft enquiry and hard enquiry. When you fetch your credit report from a credit bureau to know your credit score, it is considered a soft enquiry, while credit score enquiries by card issers/banks to determine your eligibility for a loan/credit card is known as a hard enquiry. Your credit score is affected only by hard enquiries, soft enquiries have no impact on your credit score.

How to Improve Your Credit Score

Sometimes, due to bad financial habits or some unwanted circumstances, your credit score might go down. But the good news is, there are ways to improve your credit score. Here are some of the measures you can take and corrections you can make to improve your score:

Regularly review your credit reports:

Before you can take any steps, it is important to know exactly what is affecting your credit score. For this, you need to do a detailed analysis of your credit report. You can download your report from CIBIL’s official website.

Maintain Financial Punctuality:

As mentioned before, timely repayment of loan instalments and credit card bills is the single most important factor that affects your credit score. You must clear all your dues and make sure that you make future payments on time.

Keep credit utilisation low:

Credit utilisation refers to the amount of credit limit that you exhaust during a given time period. For example, if the credit limit on your credit card is Rs. 1,00,000 and you spend Rs. 50,000, your credit utilization is 50%. Experts suggest you should keep your credit utilisation below 30%. This will have a positive impact on your credit score.

Don’t apply for too many loans/credit cards:

Every time you apply for a loan or a credit card, your bank or financial institution requests your credit report from CIBIL. More such requests mean a negative impact on your CIBIL score. Therefore, if your loan is rejected, instead of reapplying, it is advisable to wait until your credit score improves.

Try secured credit cards:

In case your credit card or loan application is getting rejected again and again, you may opt for a secured credit card. Many private banks issue secured credit cards these days without caring about your credit history. These credit cards are issued against a fixed deposit of a certain amount (usually the minimum amount required is Rs. 20,000 or Rs. 25,000) with a credit limit of 80-85% of the fixed deposit amount. Such credit cards are also known as credit builder cards as they are frequently used by students or young professionals who are building their credit profiles from scratch.

Maintain a good ratio of secured and unsecured loans:

A healthy ratio of secured and unsecured loans indicates that the borrower has the experience of handling both types of loans. Credit cards are usually unsecured, while a loan issued against a mortgage is considered a secured loan.

Avoid revolving credit:

Banks often allow credit cardholders to pay only a minimum balance (a certain portion of your bill) on their credit card bills. This results in revolving credit (repeated credits). To maintain a good credit score you must avoid any revolving credit by paying your credit card balance in full each month.

If you follow the aforementioned tips, your credit score will definitely improve. Obviously, it will take some time, but patience is the key. A score of 750+ will make you eligible for almost all financial loans and credit cards.

Credit Report Errors

Sometimes, due to incorrect information or clerical errors, there might be some discrepancies in your credit report. Credit report errors can be broadly classified into three categories-

• Identity Errors: Spelling mistakes, incorrect PAN, incorrect address or phone number fall in this category.

• Reporting Errors: Errors in your credit report related to your credit card/loan accounts fall in this category.

• Database Errors: Errors such as one credit account appearing multiple times or an account not appearing at all arising due to a corrupt database fall in the category of database errors.

If you notice any error in your credit report you can get it rectified by contacting the concerned credit bureau. All credit bureaus have a dedicated section on their websites just for this purpose. For more details on how to report your credit report errors and get them corrected, you may refer to this article on our website.