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1. What is Credit score

Credit Score is a measure of a person’s capability to pay back a debt, creditworthiness. A credit score ranges between 300 – 900 points. The higher the credit score is the better the possibility of getting a loan. The lower the credit score, the harder to get a loan.
Credit scores are usually calculated by credit bureaus, which take into consideration variables like length of credit history, repayment records, credit inquiries, etc. This score is used by banks and other financial institutions to check an individual’s ability to repay the loan. With a high credit score, the individual is entitled to get better pricing and discount on the interest rates. An individual with a high credit rating can even negotiate with the lender for better interest rates on the loan.

 

2. Credit score range and significance

As mentioned earlier an individual’s credit score can range between 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 their credit score will be 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 considered 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.

 

3. Who computes credit scores?

Credit scores are calculated by the Credit Information Companies – CIBIL TransUnion, Experian, Equifax and High Mark.

When an individual makes a transaction relevant to determining their credit score, the banks send the transaction details to all the four credit bureaus. The RBI mandates this transfer of data. Hence, when a bank wants to check an individuals credit score they will approach one of the bureaus.

Once the bureaus receive the 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.

 

4. How does one credit score decrease?

A person’s credit score is affected by a number of factors:

  • Delay in credit payments
  • Non-payment of dues
  • Account charge off due to non-payment of dues on credit card.
  • Account being sent to collection due to non-payment of credit card dues
  • Filing for bankruptcy
  • Maxing out of credit card
  • Closing a credit card with an outstanding balance
  • Closing old credit cards thereby shortening the credit history
  • Applying for multiple credit cards or loans in a short time period
  • Homogeneity of credit account
  • Irregular check on credit reports

5. How to improve 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 on a regular basis will help 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 simply means the amount of credit the person uses in a given period. Ideally, one should utilise only 30% 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 though negative history can affect the credit score, it will be removed from the credit report after a certain time period. Losing credit history can have an adverse effect on one’s credit score.
  • Credit Planning: Most lapses in credit payment happen due to the lack of planning. It is always best to set in place a financial plan to adhere to. 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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