UNDERSTANDING HOW CREDIT SCORES WORK
A credit score is a three-digit number issued to the individual on the basis of his credit history and measures how creditworthy he is. If someone has an unhealthy record of loan repayment, then that speaks volumes to the lender about his creditworthiness. One can get a loan or credit card, but at what price is determined after the calculation of credit score. Institutions bank upon credit scores to determine how much risk they are undertaking in lending money to a person. Let us now look into the ways of checking the credit scores, factors affecting the scores, and why one needs to keep a good score alive.
WHAT IS A CREDIT SCORE?
Credit score, a three-digit number, has its usual range between 300 and 900. The higher this number is, the better is the creditworthiness. This score is derived from the individual’s credit history, which includes loans taken, the credit card usage, his payment history, etc.
CREDIT RATING COMPANIES IN INDIA
The RBI has issued licenses to four established credit rating firms in India for providing credit scores. The firms gather and analyze data in the financial fields to derive a credit score for people as well as organizations. The four significant credit rating companies are:
- TransUnion CIBIL: The common name given to this score is the CIBIL score. It is one of the most widely recognized scores given in India. There is wide application of the same score by lending institutions in approval of loan and credit card applications.
- Equifax: It is a collaboration formed between American and Indian companies. Credit reports from Equifax are presented in a format that is easy to understand and gives individuals and organizations an easier view of their credit status.
- Experian: This is an international credit bureau, rather strong in India, which provides credit scores along with elaborate reports. The interesting aspect of this one is that, right now, it provides free credit score checks through WhatsApp.
- CRIF Highmark: This one is a purely Indian entity with the envious attribute of being the world’s largest microfinance credit database. It gives credit scores to an individual as well as an organization.
HOW TO CHECK YOUR CREDIT SCORE?
Each of these four credit bureaus allows users to request a free credit score report once a year. There are also numerous free websites online that offer this facility. You can log onto any one of these credit bureaus’ websites and then provide details like your Aadhar card, PAN number, among other appropriate personal details, to check your credit score. Experian has also made it even easier, as they allow users to request their credit score directly through WhatsApp.
UNDERSTANDING THE CIBIL SCORE RANGE
Like other credit scores, the CIBIL score ranges from 300 to 900. And here’s what each range means:
| CIBIL Range | Rating | Implication |
|---|---|---|
| 300-499 | Poor | High risk of loan rejection. |
| 500-649 | Average | Possible loan approval at high-interest rates. |
| 650-749 | Good | Likely loan approval at moderate interest rates. |
| 750-900 | Excellent | Easy loan approval at low-interest rates. |
Individuals with scores of more than 750 are deemed highly trustworthy. This further means they are likely to obtain their loans under more favorable conditions. People with lower scores are going to experience problems in obtaining loans and credit cards, and sometimes a higher interest rate or more restrictive terms may be required.
FACTORS INFLUENCING YOUR CREDIT SCORE
Credit bureaus, however, base your credit score on the following characteristics of your conduct as regards finance:
- Active Credit Accounts: This includes mortgages, credit cards, overdrafts, loans, and any record of late payments, missed payments, or defaults.
- Credit Agreements: It entails financial agreements like mobile phone contracts, car finance, home finance, etc.
- Buy Now Pay Later Services: Payments made through these services, which allow for interest-free installment purchases, can also impact your credit score.
- Recently Closed or Settled Credit Accounts: The credit account recently closed, or those recently settled might also be considered.
- Public Record Information: Legal records, such as County Court Judgments (CCJs), bankruptcies, and Individual Voluntary Arrangements (IVAs), can significantly affect your credit score.
- Fraud and Identity Theft: Any fraud history, either committed against you or by you, for example, stealing someone’s identity, may also be considered in determining your credit score.
CONCLUSION
Checking one’s credit score along with information that influences it is essential to maintaining one’s financial health. Credit scores play a significant part in loan offers and interest rates, meaning a good credit score will give any individual better loan offers, low interest rates, and more wide-ranging financial options. By consequently checking your credit score and making informed financial decisions, your creditworthiness will persevere.
