What is Credit Score?

A credit score ranges between 300 – 900 points. The higher your credit score, the better are your chances at availing a loan or getting a credit card. In short, one of the major factors that play a role in deciding whether an applicant is eligible to get a new line of credit is his creditworthiness.

The credit bureau determines your credit score after taking various aspects such as the period of your credit history, repayment capacity and credit inquiries among others into account. The banks/financial institutions refer to this score to recognise an individual’s ability to repay the loan. Having an excellent credit score gives you the power to negotiate with the lender for better interest rates on your loan. Individuals with good score are also offered better pricing and special concession on the interest rates.

What is Credit Awareness?

Being credit aware means you are responsible enough in handling your finances and improving your creditworthiness. The Reserve Bank of India (RBI) has instructed credit information companies or credit rating agencies to create credit awareness among consumers about credit behaviour and credit scores to manage finances better.

Credit Score Range and Its Significance

As mentioned earlier, an individual’s credit score can range from 300 to 900 points. The higher the credit score, the better the chances of getting a loan. Here are the different credit score ranges and their significance:

• NA/NH: If the individual does not have a prior credit history, the credit score is displayed as Not applicable (NA)/ No History (NH).
• 300 – 549: Individuals falling in this range are considered to have a bad credit score. It implies that the individual has defaulted on payments and have unpaid dues.
• 550 – 649: Individuals in this range is considered average and would need to improve their credit score.
• 650 – 749: This range is regarded as a good score and lender will be willing to offer loans and credit cards. Although the individual still will not be able to negotiate a deal with the lender.
• 750 – 900: Individuals in this range are considered to have an excellent credit score. Individuals in this range will be offered loans and can negotiate interest rates and credit cards with better rewards.

Who Calculates the Credit Scores?

Credit scores are calculated by the Credit Information Companies such as – CIBIL Score TransUnion, Experian, Equifax Credit Score and High Mark. When an individual makes a transaction relevant to determining their credit score, the banks send the transaction details to the credit bureaus. The RBI mandates this transfer of data.

When a bank wishes to check an individual’s credit score, they approach one of the bureaus for his/her credit report. Once the bureau receives information from the banks, they start accumulating more information about the individual’s financial habits from other institutions. They compile this information and formulate the credit report. A credit report is essentially a financial marks card and contains the individual’s credit score.

Practices Which Affect Credit Score

A person’s credit score is affected by several factors:

• Delay in credit card payments
• Missing your loan dues and credit card bills
• Account charged off due to non-payment of dues on credit card.
• Account being sent to collections due to non-payment of credit card dues.
• Filing for bankruptcy.
• Maxing out the credit card.
• Closing a credit card with an outstanding balance.
• Closing old credit cards thereby shortening the credit history.
• Having multiple credit cards at the same time.
• Homogeneity of credit account.
• Irregular check on credit reports.
• Applying for loans too many times in a short period.

How to Improve My Credit Score?

There are a few ways of fixing or improving one’s credit score:

• Keep a regular check on Credit Report: Checking the credit report regularly will help you identify any discrepancies that are on the report. Once the discrepancy has been detected, steps to rectification need to be taken immediately. Any such discrepancies can have a drastic effect on the credit score.
• Settle outstanding bills: It is always best to settle any credit dues as soon as possible. Delaying outstanding dues can lower the credit score. It is advisable to set an auto-debit facility to ensure that the dues are always paid on time. It is wise to avoid paying just the minimum amount due, always make sure to pay off the full bill.
• Credit Utilisation: Credit utilisation is a significant factor while calculating a credit score. Credit utilisation means the amount of credit the person uses in a given period. Ideally, one should utilise only up to 40% of the available credit. If an individual has multiple credit cards, they should keep a regular check on their credit utilisation.
• Maintain old accounts: Sometimes, individuals deactivate or remove accounts due to negative history in the hope that it will improve the credit score. This is not advisable, even if negative history can affect the credit score, as it will be removed from the credit report after a specific period. Losing credit history can harm one’s credit score.
• Credit Planning: Most lapses in credit payment happen due to the lack of planning. It is always advised to stick to a financial plan. A lack of a financial plan can lead to excessive use of credit facilities or even the lapse in payment of credit dues. In both cases, one’s credit score will be affected negatively.

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