What is a credit score?
A credit score is a grading given to you to denote your creditworthiness. A Credit Score can range between 300 to 900, 900 being the highest. Having a good credit score is very crucial when you are seeking a line of credit from a bank or any other financial institution. A good credit score can also mean a lower interest rate on loans, so this makes it extremely important when it comes to taking large lines of credit for long term goals like purchasing a home.
Who evaluates your credit score?
Companies that compute Credit Scores are called Credit Information Companies (CICs). There are four CICs that operate in India and banks are required by the Reserve Bank of India (RBI) to provide all credit transaction information to all four of these companies. These companies are:
Credit Information Bureau Limited (CIBIL)
CIBIL was founded in the year 2000. CIBIL was India’s first Credit Information Company and is still a pioneer in this field. The company has over 2,400 members from all the leading banks, financial institutions, non-banking financial companies (NBFCs) and housing finance companies.
Equifax Credit Information Services
Equifax is an Infomation Solution company that provides Credit Information Solutions as one of its products. The company operates in 24 countries across North America, Central and South America, Europe, and the Asia Pacific, it is headquartered in Atlanta, Georgia. Equifax is a publicly traded company on the New York Stock Exchange (NYSE) under the symbol EFX. Equifax was founded as a Retail Credit Company in 1899 by Cartor and Guy Wolford.
Experian is a Global Information Services Company that is Based in Dublin, Ireland. The company operates in 36 countries and is headquartered in the United Kingdom, the United States, and Brazil. The company is publicly traded on the London Stock Exchange (LSE) under the symbol EXPN. Experian services over 12,000 clients across the globe. In 2016 Forbes named on one of the “World’s Most Innovative Companies”.
CRIF High Mark Credit Information Services
CRIF High Mark was founded by Dr. Anil Pandya in 2007 and is a Mumbai-based Credit Bureau. High Mark commenced its Bureau operations in 2011 after receiving a Certificate of Registration (CoR) from the RBI. High Mark pioneered India’s Microfinance Bureau Database, which has now grown to become the world’s largest Microfinance Bureau Database. CRIF is global FinTech company that was established in 1988 in Bologna, Italy. CRIF acquired a majority stake in High Mark in mid-2014. After the acquisition, High Mark Credit Information Services was renamed CRIF High Mark Credit Information Services.
How is Credit Score calculated?
There are a number of ways to calculate a person’s credit score. The data and the methods used to calculate a Credit Score can vary. There are a few principal factors taken into the calculation of almost every credit score, the weight of each factor can vary depending on the scoring model. These factors are:
- Utilized Credit versus Available Credit
- Length of Credit History
- Payment History
- Number of Accounts
- Types of Credit
Utilized Credit versus Available Credit
Available Credit is the total credit you are eligible to receive and Utilized Credit is the total credit you have taken on. Having a lot of Available Credit is good for your credit score as it shows that you are managing your finances well and are not heavily dependent on credit. Credit Cards provide us a good example of Available Credit through the form of Credit Limits. A Credit Limit defines the maximum amount of debt outstanding you are allowed to have at any point in time. It is a good idea to limit your Utilized Credit to 30% of your Available Credit. For example, if your Available Credit is Rs. 1,000, you should try to utilize only Rs. 300.
Length of Credit History
Credit History is one of the primary factors taken into consideration while calculating a Credit Score. Therefore, it is important to create a Credit History because without one CICs can’t determine what type of a borrower you are. The minimum length of credit history required to be able to calculate someone’s Credit Score is approximately 6 months.
One of the heaviest weights is usually carried by your Payment History. This is a record of the total credit payments you have made and the consistency of these payments. A few late payments of Credit Card bills will not drastically affect your credits score if your overall payment history is good, on the other hand, if you make all your credit payments on time it doesn’t necessarily mean that you will have a perfect Credit Score as this is just one of the many factors taken into consideration while calculating a Credit Score.
Number of Accounts
Number of Accounts refers to the total number of lines of credit you use, this can be Credit Cards, Loans, Overdrafts etc. There is no ideal number of Credit Accounts a person can have, but it’s beneficial for your Credit Score to have a mix of a couple of lines of credit that are well managed.
Types of Credit
There are various types of credit you can avail. You can avail long-term credit for things like purchasing a home or taking up higher education through Home Loans and Education Loans. Medium and short term credit can be availed through Credit Cards and other facilities like Overdraft and short-term loans. A large amount of short term credit can indicate towards erratic spending habits, this does not reflect well on your Credit Score. Timely payments of long-term credit like home loans reflect well on your Credit Score.
What are the benefits of a good Credit Score?
A good Credit Score is your ticket to very crucial lines of credit at the lowest interest rates. If you have a high Credit Score of 750 or above you are considered a “low-risk” loan candidate, this signifies that the probability of you defaulting on your loan payments is very low, for this banks and other financial companies would like your patronage. A good Credit Score can, therefore, get you lower interest rates, larger loan amounts, faster approvals, longer repayment cycles, and lots more.
How to improve your Credit Score?
A good Credit Score is anything above 750. If you have a bad credit score do not worry, there are always methods to improve your creditworthiness and increase your Credit Score. Here are a few steps to improve your Credit Score:
- Make sure your loans are always being paid on time.
- Reduce the number of loans you take on in a year.
- Maintaining a low debt-to-income ratio i.e. the percentage of your income that goes towards repayment of debt.
- Maintaining a balance between secured and unsecured loans.