Deciphering Credit Scores

Anytime you apply for a loan, the lender takes a look at your credit profile. Now, imagine a scenario: You want a home loan to buy the house of your dreams. You go to a bank and apply for the same but unfortunately, your request gets denied due to your low credit score. Why did this happen? What exactly is a credit score? And why is it so important?

To understand this from the grassroots level, let’s discuss the concept of credit score or CIBIL score?

Your credit score is a three-digit number that directly reflects on your creditworthiness. It is an instrumental part of your financial profile, and having a good credit score plays a massive role in bettering your financial lifestyle.

A good credit score can help increase your chances of getting loans and even secure them at low-interest rates. Good credit scores have a plethora of benefits attached to them, including smoother applications for credit cards and higher limits of credit. But, here the main question arises, what can be regarded as a great credit score?

The Credit Score Scale:

There are four credit Bureaus in India:

  1. TransUnion CIBIL
  2. Equifax
  3. Experian
  4. CRIF Highmark

It is the TransUnion CIBIL that prepares this three-digit number and it generally ranges from 300-900. Now, let’s decode what it means:

Maintaining a Good Credit Score:

We have seen what benefits a good credit score can provide us with and hence, it is crucial to maintain it well within the top range. A bad credit score always points to insincere or undisciplined financial behavior and here are some ways to avoid that:

  1. Credit Utilization Ratio: Always preserve your credit utilization ratio and maintain it in between 30%-40%. This showcases that you understand your credit limits and that you are not credit hungry.
  2. Timely Payments: Pay off your credit cards bills, EMIs, and other dues on time, and consistently. 30% weightage of your credit score calculations is based on this and hence, this is the first step that you would want to take to secure a good credit score.
  3. Length of your credit history: The lengthier the credit history, the better. It directly reflects on your credit behavior and it gives the concerned parties a better view of how you handle your finances. Try not to close your oldest credit cards as it will shorten your average credit age.
  4. No multiple credit applications: Applying for various credit cards can prove to be a bane for your credit score. Whenever an individual applies for a loan or credit card, the applicant’s credit report is looked into by the lender (hard inquiries). This may reduce the applicant’s score by a few points.
  5. Credit exposure: Credit exposure is often examined at the time of lending and it is always favorable to have a diverse credit exposure from the lender’s perspective.

The bottom line is that good credit scores really matter and they can reap colossal benefits. It is of utmost importance to know the credit facts and separate them from credit myths. Keeping your credit score in check and reviewing your credit reports twice a year is always a great practice. It takes time to build an excellent credit score but… Spoiler alert!

It is always worth it.

Symbiosis College – Bcom (Honors), CFA Level 1 Candidate

More Posts