One of the most important factors lenders consider while processing your loan or credit card application is your credit score. Credit Score is a 3-digit number that is calculated basis a person’s past behaviour with credit. It is scored out of 900 and is used by lenders to analyze an individual’s creditworthiness and financial prudence.
Credit Score in India is offered by four Credit Information Companies or Credit Bureaus – TransUnion CIBIL, Equifax, Experian and CRIF Highmark. These institutions are licensed to collect and maintain financial records pertaining to individuals and generate credit reports/ credit score based on this data.
Individuals can easily access their credit report online and know their credit score. It’s advised to check your credit score at least once every 3 months.
The credit report is created using a borrower’s credit history with detailed information of his/her prior borrowings (credit card and loans) and how loans/credit cards have been handled in the past. Apart from credit history, credit report also contains a list of banks/NBFCs that have made an enquiry for the consumer’s credit report.
Credit score is calculated using a complex proprietary formula using the credit history data of the individual. This complex formula takes into account a range of factors such as payment history, credit utilization ratio, duration of credit history, borrowing pattern, the number of credit card or loan applications, and much more.
The formula used for generating credit score is proprietary and it varies from one credit bureau to another, so the credit score of the same individual also varies from one CIC (Credit Information Company) to another. Credit score is one of the key factors considered by lenders when approving a loan or credit card application. The closer an applicant’s score is to 900, greater are the chances of being approved for new credit cards and/or loans.
The importance of a good credit score for those seeking a new loan/credit card cannot be overstressed. Hence it is important to know the key factors affecting your credit score. Some factors which affect a person’s credit score are given below:
a) Credit Utilization Ratio: Credit Utilization Ratio is obtained by dividing the total credit availed by the available credit limit across all credit cards and loan accounts. It indicates your dependence on credit. A high credit utilization ratio indicates greater repayment burden and negatively impacts your credit score. A low credit utilization ratio (30% or lower) indicates low repayment burden that can help improve credit score.
b) Multiple Simultaneous Loan Enquiries/Applications: Making several loan enquiries and applications with multiple lenders within a short period of time shows you to be credit hungry. This also leads to an increase in the number of hard inquiries made by these lenders on your credit report which negatively affects your credit score.
c) Repayment History:A history of timely payment of your EMIs (equated monthly instalments) and credit card bills helps maintain a high credit score. Similarly, frequently missing of credit card or loan EMI payments has a negative impact on your score.
d) Credit Mix:It is good to have a balanced mix of secured (collateral backed) and unsecured (not backed by collateral) credit. Having too much unsecured debt like multiple credit cards bills and personal loansmay adversely affect your credit score. On the other hand, if you have a mix of secured loans (like Auto and Home loans) and unsecured credit, you have greater chance of having a high score.
e) Errors in Credit Report:Your credit score may be adversely affected by errors in the credit report like incorrect mention of default in repayments, outstanding loan accounts, etc. These may be administrative errors or may indicate identity fraud. Fixing these errors at the earliest can help you maintain a high credit score.
In India, credit is categorized as secured credit or unsecured credit.
- Secured credit is backed by collateral. Examples are home loan, loan against property, gold loan, car loan, etc.
- Unsecured credit is not backed by collateral and examples are credit cards and personal loans.
While no exact figures are available, you should ideally have a mix of secured and unsecured credit to maintain a high credit score. Too much unsecured credit is usually viewed as a heavy reliance on debt which can decrease your score.
Licensed credit information companies (CIC) also known as credit bureaus collect loan and credit card information of individuals and businesses to generate credit reports and calculate credit score. Lenders in turn use this data to evaluate credit card and loan applications received by them. Credit score and credit report thus helps lenders determine the creditworthiness of an individual. The 4 credit bureaus or CIC currently operating in India are:
- TransUnion CIBIL
- CRIF Highmark
You can check your CIBIL score as well as scores provided by other credit bureaus such as Equifax, Experian and CRIF Highmark for free online on the Paisabazaar.com website. The step-by-step method to check your credit score through Paisabazaar.com is as follows:
Step1. Visit the Paisabazaar.com home page and click on the ‘Get Report’ button at the top of the page
Step2. On the subsequent page, fill in details like your Name, Date of Birth, PAN number, etc. and click on the checkbox to agree to the terms and conditions associated with checking your credit score.
Step3. Click on ‘Get Your Credit Score’ to access to your credit report and score for free online.
India’s 4 credit bureaus – TransUnion CIBIL, Equifax, Experian and CRIF Highmark use different scoring models to calculate credit score. These models utilise several aspects of a borrower’s credit history (including repayment history, credit utilisation ratio, age of credit, etc.) to assign the 3 digit credit score between 300 and 900. As each credit bureau uses its own proprietary scoring model, the score of the same individual varies from one CIC to another. But irrespective of which scoring model is used, the closer your score is to 900, the higher your score and chances of approval for a new credit card or loan.
Credit Score is a 3 digit numeric representation of your credit history. It ranges from 300 to 900 and reflects a person’s credit behaviour. This 3 digit number effectively sums up an Individual’s credit history including repayment track record, current debt level, length of credit history and much more. A higher credit score generally leads to more favourable credit terms. Key details that are included in a credit report are:
- Credit score,
- Detailed information of loans and credit card accounts including limits, outstanding balance and current status (active, closed, default, etc.)
- Information regarding late payments (date past due or DPD) and defaults (if any)
- A list of entities that have made an enquiry for your credit report and the reason for the enquiry (new loan/new credit card, etc.) along with date of enquiry
- Your personal information
*It must be pointed out that credit reports in India do not include information about your savings, investments, utility bill payments, house rent payments, etc. Credit scores range between 300 and 900. A score closer to 900 (typically 750 or higher) is generally considered to be a good score and indicated fiscal prudence.
Some ways to improve your credit score are given below:
- Pay your credit card bills and loan EMIs on time
- Ensure minimum outstanding debt
- Keep your credit utilisation ratio lower than 30%
- Do not apply for multiple loans and/or credit cards simultaneously
- Maintain a balance between secured and unsecured credit
Credit score helps lenders determine the creditworthiness of an individual and assess the risk of default on repayments. In effect it acts as a first impression for the lenders. The higher your credit score, the higher are the chances of an individual securing a loan on favourable terms. Credit score impacts your eligibility to secure all types of credit be it personal loan, car loan, home loan or credit card in the following ways:
- Personal Loans: A low credit score usually decreases your chances of approval, whereas, a high credit score increases chances of approval. A high credit score may also lead to the individual securing credit on more favourable terms such as a lower interest rate
- Car Loan: Individuals with higher credit score are often able to secure car loans with lower rate of interest and may also qualify for special offers such as lower processing fee, zero down-payment, etc. on new car loans
- Home Loan: A good credit score increases your chances of securing a home loan and may even get you a preferential low interest rate
- Credit Cards: A high credit score increases your chances of approval for a new credit card. You may also get benefits such as a higher credit limit, access to credit cards with better rewards and benefits, etc.
Though credit score is not the only thing that lenders consider when lending money to a person, it is definitely one of the first things that lenders look into when evaluating loan applications. There are several benefits of maintaining a good credit score. Some of these are given below:
- Increases the chances of your loan/credit card application being approved
- Greater access to pre-approved loans/credit card offers
- Higher chance of securing credit on more favourable terms
- Get credit cards with better rewards and benefits
- Avail higher credit card limit on your credit card
- May lead to discounts on processing fees and other key charges of new loans
In some cases, the terms credit score and credit rating are used interchangeably, but they have significant differences. Key differences between credit score and credit rating are given below:
|Credit Score||Credit Rating|
|Credit score is a 3 digit numeric summary of an individual’s credit history that helps lenders determine the creditworthiness and financial health of a credit card/loan applicant||Credit rating is assigned to financial products like bonds, corporate fixed deposits, debentures, Certificate of Deposit (CD), etc. Credit ratings feature alphanumeric combinations like A1+, AAA, etc.|
|4 Credit institutions are currently licensed to generate credit report and credit scores in India are TransUnion CIBIL, Equifax, Experian and CRIF Highmark||Companies authorised to give credit rating to financial products are CRISIL, ICRA, Brickwork Ratings India, etc.|
|It helps lenders evaluate the risk involved in lending money to an individual||It helps prospective investors evaluate the risk involved when investing in a particular financial product|
Note: TransUnion CIBIL currently offers a service for businesses known as CIBIL Company Report which includes a CIBIL Rank which is similar to the credit score for individuals. However, this CIBIL Commercial product is also not the same as credit rating which exclusively applies to financial products.
Q1. Is credit score & CIBIL score the same thing?
Credit score is a 3 digit numeric summary of your credit history. It is affected by a number of factors including the individual’s loan EMI and credit card bill payments, credit utilization ratio, the number of credit card or loan applications and so on.
There are 4 major credit bureaus in India which are licensed to generate an individuals’ credit report and score. TransUnion CIBIL is one of the major credit bureaus in India and the credit score generated by this company using its own proprietary algorithm is known as CIBIL score. Thus in effect, CIBIL score is just one of the 4 different types of credit score currently available in India.
Q2. What is considered to be a good credit score?
The 4 credit bureaus- TransUnion CIBIL, Equifax, Experian and CRIF Highmark, generate their own credit scores using different scoring models and thus they provide different scores for even the same individual. However irrespective of the model used credit scores in India range from 300 to 900 and a score closer to 900 (such as 750 and higher) is considered to be a good score.
Q3. How often are credit scores updated in India?
Lenders such as banks and NBFCs submit borrower’s data to credit bureaus every 30 – 45 days after which the credit scores are updated by the credit information companies. Paisabazaar provides free monthly updates of your credit score automatically once you sign up.
Q4. Is good credit score needed to buy a house?
In case you want to get a home loan to purchase a house, credit score is generally the first thing that lenders will look at to assess your creditworthiness and repayment ability for the home loan.
Q5. Can credit score affect your ability to get life insurance?
No, credit score only determines the creditworthiness of an individual or the risk involved in lending money to a person. It does not affect your ability to secure insurance in anyway.
Q6. How many credit score points are lost for an inquiry?
There are two types of inquiries-hard inquiries and soft inquiries. Soft inquiries are made by the individual himself/herself and these do not impact the credit score irrespective of the number of times it is done. On the other hand hard inquiries are those that are made by lenders and financial institutions when the individual applies for new credit i.e. new loan or credit card. In most cases, hard enquiries lead to a decline of only a few points
Q7. Why do different credit bureaus have varying credit scores?
Different credit bureaus have varying credit scores as there is a difference in the scoring model used by them. As a result, even though the data in the credit report is the same, there is a difference in the score depending on which credit information company computes the score.
Q8. What is the best/ideal credit score?
It is difficult to determine the best/ideal credit score. However, a score closer to 900 such as 750 or higher is generally deemed to be a good score in order to be approved for a new loan/credit card.
Q9. Is credit score and FICO score the same?
No, FICO score is only one type of credit score. Credit score is a wider term and used to refer to the score calculated by different credit information companies operating in India – TransUnion CIBIL, Experian, Equifax and CRIF Highmark. FICO score is calculated by the credit information company Fair Isaac Corp. using its own proprietary formula and it currently does not operate in India.
Q10. What is the minimum credit score to secure a home loan?
There is no minimum credit score to secure a home loan. The closer your score is to 900, the better are your chances of securing a home loan. As per CIBIL records, those with CIBIL score of 750 or higher have been most successful in securing home loans.
Q11. Can credit score be zero?
No, the credit score can never be zero. However, in case an individual has no credit history or is very new to credit, they may be have credit scores such as “NA” or “NH”.