The numerical evaluation of a borrower’s financial reliability, commonly known as a credit score, spans between 300 to 900. This pivotal metric is leveraged by prospective lenders in India who rely on the computation provided by credit agencies like CIBIL TransUnion, Experian, or Equifax to ascertain the creditworthiness of a credit card holder or loan seeker. In fact, numerous lenders rely solely on a borrower’s CIBIL score as the litmus test for loan approval.
The numerical representation of one’s creditworthiness, known as the credit score, is a trifecta of numbers spanning from 300-900, evaluated by credit bureaus. Financial institutions, namely banks and non-banking finance companies (NBFCs), typically deem a score of 750 or higher as desirable. The calculation of this score varies among credit bureaus, each utilizing their own distinctive algorithm. An amalgamation of elements such as payment history, credit utilization, credit age, and credit type comprise the crux of this score.
Factors That Affect an Individual’s Credit Score
Regular Payments
The status of your payment history carries immense weightage and could be the make or break factor for your score. A record of unwavering commitment in paying off your bills and loan EMIs showcases your prudence as a borrower and significantly mitigates the possibility of non-payment. Furthermore, conscientious credit behavior opens doors to privileged loan rates and rapid application approvals. However, failure to adhere to timely payments, defaulting, or delinquency will result in a considerable decline in your score, with significant repercussions.
Credit Utilization Ratio
This intricate metric examines the percentage of total credit you have utilised against the available credit limit at your disposal. To compute the credit utilisation ratio, you must divide your outstanding balance by your total credit limit. Industry experts recommend keeping credit utilisation ratio at the minimumto optimise your score and elevate your creditworthiness.
Credit Age
The age of your credit holds a vital place in determining your creditworthiness. Your past credit experiences coupled with your present credit performance cumulatively contribute towards the computation of your score. An unblemished credit record reflecting consistent and timely payments on active credit lines signifies a dependable borrower, thereby giving a fillip to your score. A substantial credit history provides lenders with a credible perspective to evaluate the risk quotient involved in extending credit to you.
Comprehensive Accounts
The equilibrium between secured and unsecured credit assumes paramount importance in safeguarding your credit score. While credit cards exemplify unsecured credit, secured credit can take the form of car or home loans. The ideal blend of both credit types exerts a positive influence on your score, albeit with a slightly lower impact in comparison to other crucial factors. Beware of excessively availing of only one type of credit, for it could potentially mar your score.
Tips to Improve Credit Score
Bill Payments on Time : One of the paramount constituents that can weigh on your credit score is the timeliness of your bill payments. Consequently, it is paramount to ensure that you make payments towards your bills and credit card dues in a punctual fashion, as any delinquencies can have an unfavorable impact on your score.
Reduce Credit Utilization: Another crucial aspect is your credit utilization ratio, which is calculated by dividing the amount of credit you have utilized by your credit limit. Experts recommend keeping your credit utilization ratio to around 30%, which is deemed optimal for sustaining a robust score.
Monitor Credit Report: Through diligent and consistent monitoring of your credit report, you can proactively identify and promptly address any inaccuracies or inconsistencies that could potentially lead to a detrimental impact on your credit score.
Limit Credit Inquiries: It is strongly advised to exercise caution and restraint when it comes to making hard inquiries on your credit report, as each inquiry has the potential to significantly diminish your credit score. Thus, it is advisable to limit the frequency and number of inquiries made on your credit report, in order to avoid any negative consequences.
FAQs
- How is credit score calculated?
The complex algorithms used to calculate credit scores take into account various factors, including payment history, outstanding balances, and frequency of missed payments. Additionally, the ratio of past-due credit accounts to total accounts on file is considered in your credit history, ultimately determining your credit score.
- Does salary affect an individual’s good credit score?
While one’s income is not a direct factor in calculating credit scores, a decrease in income that leads to difficulties in meeting financial obligations can result in missed payments, which will be reported to credit bureaus and adversely affect one’s score.
- What numbers should home loan seekers look for to avail a loan?
For those seeking a home loan, a credit score of 750 or higher is considered good and may increase the chances of being approved for a loan.
- What is considered to be a low credit score?
Credit scores below 580 are regarded as poor, indicating a high risk of defaulting on loans or credit obligations.
Final Thoughts
The role of credit scores in ensuring financial stability is of utmost importance, as they determine an individual’s creditworthiness, probability of obtaining loans or credit, and associated interest rates. The intricate algorithm that calculates credit scores factors in numerous elements, such as payment history, outstanding balances, and frequency of missed payments, which ultimately culminate in the determination of the score.
Despite income not directly impacting credit score calculations, a decline in income could lead to missed payments and subsequently lower the credit score. A good credit score is fundamental, and scores above 750 are deemed ideal for obtaining home loans, while scores below 580 are indicative of a higher likelihood of defaulting on credit obligations.
Vigilantly monitoring credit reports and minimizing hard inquiries on credit reports can also aid in maintaining a favorable credit score, ultimately contributing to a sound financial future.
(ThePrint ValueAd Initiative content is a paid-for, sponsored article. Journalists of ThePrint are not involved in reporting or writing it.)