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Talk to an ExpertWhy keep track of credit score?
How can you improve your credit score?
What does your credit score means?
Indicates substantial credit difficulties. May encounter challenges in obtaining loans and could face higher interest rates or restrictive terms.
What is a Credit Score?
A credit score is a numerical representation of your creditworthiness, reflecting how reliably you manage debt.
Ranging typically from 300 to 900, your credit score is calculated based on factors such as your payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries.
What is a Good Credit Score?
A good credit score typically falls within the range of 700 to 900. This range reflects how responsibly you have managed debt, including credit cards, loans, and other financial obligations.
Note: The definition of a “good” credit score varies depending on the credit scoring model and the country in which you reside.
Benefits of a Good Credit Score
A good credit score offers numerous financial advantages, making it easier to access credit and secure better terms. Here are the key benefits:
- Higher approval rates for loans and credit cards.
- Access to a wider range of financial products with better terms.
- Lower interest rates, reducing overall borrowing costs.
- More favourable repayment terms, such as lower fees.
- Increased credit limits, offering greater spending flexibility.
- Lower insurance premiums for auto, home, and life policies.
- Eligibility for premium credit cards with top-tier rewards.
- Access to exclusive offers like sign-up bonuses and promotional rates.
Top Credit Bureaus in India
The Reserve Bank of India (RBI) has licensed four major credit bureaus in the country:
TransUnion CIBIL Limited (CIBIL)
Established in 2000, CIBIL is one of the oldest and most widely recognized credit bureaus in India. It was acquired by TransUnion in 2017, a global leader in credit information and information management solutions, enhancing its capabilities and reach.
| Credit Score Range | Rating |
|---|---|
| 750-900 | Excellent |
| 650 – 750 | Good |
| 550 – 650 | Average |
| 300 – 550 | Poor |
Experian
Experian, a global information services company, launched the first CICRA-licensed credit bureau in India, named Experian Credit Information Company of India Private Ltd in November 2009.
This development marks the first new operational credit bureau in India in over six years, providing credit reports to lenders and consumers in compliance with Reserve Bank of India (RBI) guidelines.
| Credit Score Range | Rating |
|---|---|
| 850+ | Excellent |
| 750 – 850 | Very Good |
| 650 – 750 | Good |
| 500 – 650 | Average |
| 300 – 500 | Poor |
Equifax Credit Information Services Pvt Ltd
Equifax is a global information solutions company headquartered in Atlanta, Georgia, with operations in 24 countries. A member of the S&P 500 and listed on the NYSE under the symbol EFX, Equifax has over 123 years of experience in the credit industry. It manages data on over 820 million consumers and 91 million businesses.
In 2010, Equifax entered the Indian market as a licensed Credit Information Company and expanded further in 2014 by acquiring an analytics firm.
| Credit Score Range | Rating |
|---|---|
| 800 – 850 | Excellent |
| 740 – 799 | Very Good |
| 670 – 739 | Good |
| 580 – 669 | Average |
| 300 – 579 | Poor |
CRIF High Mark
CRIF is a global FinTech company specialising in credit bureau services, business information, analytics, and scoring solutions. In India, CRIF operates through CRIF High Mark, an RBI-licensed credit bureau that provides credit information services; CRIF Solutions, which offers advanced analytics, scoring services, and credit management solutions; and CRIF Connect, an RBI-licensed account aggregator.
With a focus on supporting financial institutions, banks, and businesses, CRIF helps improve credit decision-making and risk management in India, leveraging its global expertise and presence in over 26 countries.
| Credit Score Range | Rating |
|---|---|
| 750-900 | Excellent |
| 650-750 | Good |
| 500-650 | Average |
| 300-500 | Poor |
How is Your Credit Score Calculated?
| Factors | Description | Impact |
|---|---|---|
| Payment History (High Impact) | Assess your track record in repaying debts, including credit cards and any type of loan | Positive Impact: Consistent and on time payments boosts your credit score. Negative Impact: Late or missed payments and defaults can significantly lower your score. |
| Credit Utilisation Ratio (High Impact) | The ratio compares the amount of credit you’re using to the total credit available to you. | Positive Impact: Using a smaller percentage of your available credit indicates responsible credit management. Negative Impact: High credit utilisation suggests potential over-reliance on credit. |
| Age of Credit (Medium Impact) | Refers to the length of your credit history, including the age of your oldest account and the average age of all your accounts. | Positive Impact: A longer credit history provides more data on your financial behaviour, which can positively affect your score. Negative Impact: A short credit history may not give lenders enough information to assess your creditworthiness. |
| Total Number of Accounts (Low Impact) | Looks at the diversity and number of credit accounts you hold. | Positive Impact: Mix of credit types demonstrates your ability to manage different kinds of credit responsibly. Negative Impact: Too many accounts opened in a short period may slightly lower your score. |
Why Credit Scores Vary Between Bureaus
- Different Algorithms: Each credit bureau uses its own proprietary scoring model, leading to variations in credit scores.
- Data Reporting Differences: Not all lenders report to every credit bureau. This means one bureau might have information that others do not, affecting the score calculation.
Factors Not Considered in Credit Score Calculation
Your credit score focuses solely on credit-related information and does not take into account:
- Age
- Income Level
- Employment Status or Tenure
- Educational Background
- Marital Status
The Role of Credit Score in Loan and Credit Card Approval
1. Primary Evaluation Metric for Lenders
- Initial Screening: Banks and financial institutions use your CIBIL score as a preliminary filter when assessing loan or credit card applications.
- Risk Assessment: A higher score indicates lower credit risk, making lenders more inclined to approve your application.
2. Influence on Loan and Credit Card Approval
- Approval Chances: A good CIBIL score (typically 750 or above) significantly increases the likelihood of loan and credit card approvals.
- Rejection Risk: Low scores can lead to rejection of applications or the need for additional guarantees, such as collateral or a co-signer.
3. Impact on Interest Rates and Loan Terms
- Lower Interest Rates: Applicants with higher scores are often offered loans at more favourable interest rates.
- Better Terms: Lenders may provide more flexible repayment options and lower processing fees to individuals with strong credit profiles.
4. Determines Credit Limits
- Higher Credit Limits: Credit card issuers are more likely to offer higher credit limits to those with good Credit Scores.
- Access to Premium Products: A strong score can qualify you for premium credit cards with enhanced benefits and rewards.
5. Faster Approval Process
- Expedited Processing: High CIBIL scores can lead to quicker approval decisions, as lenders view these applicants as low-risk.
- Pre-approved Offers: Some banks extend pre-approved loan and credit card offers to individuals with excellent scores.
6. Negotiation Power
- Leverage: A good credit score gives you the ability to negotiate better interest rates and loan terms.
- Competitive Offers: Lenders may compete to provide you with attractive deals, knowing you are a low-risk customer.
7. Influence on Loan Amount Eligibility
- Higher Loan Amounts: With a strong CIBIL score, you may qualify for larger loan amounts.
- Flexibility: Lenders may be more willing to adjust loan parameters to suit your financial needs.
Risks and Drawbacks of a Poor CIBIL Score
- Higher Interest Rates: Low scores result in higher borrowing costs.
- Loan Rejections: Many lenders may decline loan applications.
- Lower Credit Limits: Reduced access to credit, limiting spending power.
- No Access to Premium Cards: Ineligible for credit cards with top rewards.
- Stricter Loan Terms: Shorter repayment periods, higher fees.
- Need for Co-signer: Co-applicant often required for approval.
- Higher Insurance Costs: Insurers may charge higher premiums.
Quick Tips for NRIs to Build Credit in India
NRIs can obtain their credit score and report by visiting the official websites of credit bureaus like CIBIL. However, an Indian mobile number is required to generate and access your CIBIL score and report.
- Open NRE/NRO Account: Start financial activities with an NRE or NRO account in India.
- Get an NRI Credit Card: Apply for NRI-specific credit cards with easier eligibility.
- Leverage FD for Loans: Use fixed deposits to secure loans and build credit.
- Maintain a Local Address: Keep a stable Indian address for better creditworthiness.
- Pay on Time: Ensure timely payments to build a positive credit history.
- Check Your CIBIL Score: Monitor your score regularly for accuracy.
- Diversify Credit: Use a mix of loans and credit cards for a stronger credit profile.
Top 7 Reasons You Have a Low CIBIL Score
| Reasons | Description |
|---|---|
| Missed or Late Payments | Missed credit card or EMI payments lower your score. Even a single missed payment impacts your credibility |
| High Credit Utilisation | Using over 30% of your credit limit reduces your score. Indicates high dependence on credit. |
| Frequent Credit Applications | Multiple loan or card applications trigger hard inquiries. Suggests potential financial struggles. |
| Loan Defaults | Defaulting or settling loans for less reduces your score. Stays on your record for years. |
| Limited Credit Mix | Having only one type of credit (e.g., credit cards) can hurt your score. A balanced mix of secured and unsecured credit is ideal. |
| Credit Report Errors | Incorrect details or unrecorded payments can lower your score. Regularly check your report for accuracy. |
| Not Using Credit | No credit use means no repayment history. Responsible usage is key to building a score. |
Must Read: Home Loans for Low Credit Scores
How to Improve Your Credit Score?
- Pay Bills on Time: Consistently pay EMIs and credit card bills before the due date.
- Reduce Credit Utilisation: Keep usage below 30% of your credit limit.
- Avoid Multiple Credit Applications: Limit new credit inquiries to avoid hard pulls.
- Clear Outstanding Debts: Pay off existing debts to reduce your debt burden.
- Check Credit Report for Errors: Regularly review and correct inaccuracies.
- Maintain Old Accounts: Keep long-standing accounts open to build credit history.
- Diversify Credit Types: Use a mix of secured (e.g., home loans) and unsecured credit.
- Set Payment Reminders: Use alerts to ensure timely bill payments.
- Negotiate with Lenders: Work with creditors to settle or restructure debt.
- Use Secured Credit Cards: Build credit with cards backed by a fixed deposit.
Frequently Asked Questions
A credit score above 750 is generally considered good in India. It increases your chances of loan approval and access to better interest rates, making it easier to obtain loans or credit cards.
To achieve an 800 CIBIL score, pay bills on time, keep your credit utilisation below 30%, maintain a mix of secured and unsecured credit, and avoid frequent credit applications.
Improving your credit score involves timely payment of EMIs, keeping credit utilisation low, and reducing outstanding debt. Avoid applying for multiple loans simultaneously and regularly monitor your credit report for any discrepancies.
Your credit score is calculated by credit bureaus like CIBIL, based on your repayment history, credit usage, length of credit history, and other financial activities. They compile this information into a score ranging from 300 to 900.
No, credit scores are not directly decided by banks. Instead, credit bureaus compile data from banks and financial institutions to calculate your score. However, banks use this score to assess loan and credit applications.