What is Credit Score: Its Significance and Calculation

• Number of Accounts: Individuals with the highest credit scores often multiple secured and unsecured credit accounts like credit cards, home loan, personal loan, car loan, etc.
• Credit Enquiries: The number of credit accounts you have most recently opened and the number of hard enquiries the lenders make when you apply for new credit cards or loans also impact your overall score. 

How your Credit Score is Calculated

Different credit bureaus have their own unique credit score calculation models, that’s why your CIBIL Credit Score differs from your credit score of Experian, Equifax or CRIF Highmark. Below is an illustration of how Experian calculates your credit score along with the weightage each individual credit score factor:    

• Payment history accounts for up to 35 per cent of the credit score and also shows if a person pays the obligations timely. The total amount owed counts for about 30 per cent and considers the percentage of available credit that an individual is currently using. This is known as the credit utilization ratio.
• The length of credit history accounts for around 15 per cent, with longer credit histories being considered at a lesser risk as there is more data for determining payment history.
• The type of credit used accounts for up to 10 per cent of the credit score and shows if a person has a mix of installment credit such as mortgage and car loans and the resolution of credit such as credit cards.
• New credit also counts for up to 10 per cent and factors in terms of how many new accounts an individual has and the number of new accounts they have applied for recently, resulting in credit inquiries.

The above weightage of individual credit score factors is for illustration only and may vary from one credit bureau to another.

Significance of a High Credit Score

Besides understanding what credit score is, it is also important to understand its significance in your day to day life.  The credit score is a statistical analysis of your reliability when handling credit in the form of loans and credit cards so indicates your credit worthiness. Having a high credit score can give you significant benefits when you are seeking additional credit. These benefits include:

• Eligibility for lower interest rate on loans
• Availability of higher limit on credit cards
• Eligibility for higher loan amount
• Quicker processing of new credit applications like loans and credit cards

All the above benefits are directly linked to the significance a high credit score of 750 or above has. It allows you to stand out and indicates that you are judicious with your borrowings. The lender sees this as an indication that there is a lower risk of default with respect to your debt obligations. So lenders are willing to lend you a higher amount at favorable low rates. 

FAQs

1. What is considered a good CIBIL score?

CIBIL score of 700 or higher is considered as a good CIBIL score. This can make it easier to be approved for new loans or credit cards. However, do remember that CIBIL Score is just one of the 4 credit scores you can avail in India.  

2. Is it possible for the credit score to go down even if I pay on time?

Timely payment is just one of the factors impacting your credit score. You might have significant outstanding loans or taken a new loan recently, which can bring down your credit score even if you have paid on time.

3. Does zero balance in the bank account impact credit score?

No. Your bank account balance is not one of the factors that impacts your credit score. So, zero balance would not affect your credit score as long as you are making timely payments and being judicious with your use of credit.

4. Does income have an impact on credit score?

Neither your salary nor your income factors directly impact the calculation of credit score. However, loss of income that impacts your ability to pay bills on time can have an impact on your credit score.

5. Can debit cards impact your credit score?

Debit cards are not a form of credit. Therefore, their activity does not get reported to the credit bureaus and will also not appear on the credit report.

6. What are the three most significant ways to develop better financial habits and improve your credit score?

Here are some important ways in which you can develop better financial habits also improve your credit score:

• Keep your debt at a minimum
• Pay your credit card bills and EMIs on time
• Apply for a secured credit card

7. How often can I check my credit score?

You can check your credit score as many times as you like without affecting your credit. It is a good idea to check your score multiple times a year, especially before applying for a new credit card or loan. This will help you ensure that there is no negative impact on your credit score.  

Sources:

https://www.cibil.com/

https://economictimes.indiatimes.com/wealth/borrow/seven-things-that-can-impact-your-credit-score/articleshow/62063933.cms

https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/

https://www.clix.capital/check-credit-score/

https://www.cibil.com/faq/understand-your-credit-score-and-report

https://www.financialexpress.com/money/5-healthy-financial-habits-to-build-and-maintain-a-strong-credit-score/1800566/

https://blog.crifhighmark.com/how-often-should-i-check-my-credit-score-whats-the-myth-whats-the-truth/

ARN No: Nov22/Bg/15A