Credit Score: Your Financial Health Indicator

A Credit Score is basically a number which is a summary of your credit history. Usually, credit score ranges between 300 – 900. If your credit score is close to 300, then it is very poor and you need to take action to improve it. But if your credit score is close to 900 then you have managed to keep really good credit history.

These are well-known facts about credit scores. But there are a few factors which every individual should know. Today, we will look at the nitty-gritty of credit score and some tips on how you can maintain a high credit score.

Credit information companies in India

In India there are 4 well-known companies that can assign you a credit score:

1. TransUnion Credit Information Bureau (India) Limited or CIBIL
2. Equifax
3. Experian
4. CRIF HighMark

These companies gather information related to credit history from the lenders and different other financial sources to compile credit report that carries the credit score. These credit scores can be accessed by different lenders to assess the credit score before lending money to the borrower.

The score given by all four agencies has the same range i.e. 300-900 and the same significance. According to RBI’s law, all 4 credit bureaus are supposed to send a free credit report every 12 months. Hence, this report should be carefully monitored by the end-user at least once a year.

Credit Score Range and it’s meaning

As we mentioned earlier, the credit score ranges from 300-900. But here’s a detailed breakup of the score and it’s meaning:

So ideally, your credit score should be in the range of 750-900 to get the lowest possible interest on any loan you plan to take in the future. However, what if you have no loans and no sufficient credit history. How does your credit report look in this case?

As you can see since there is not enough information available the credit score is 17. You can start building a good credit score by taking a credit card. After a few months of good credit card use and on-time repayments of the bills, your credit score can look like this:

Please note that these snapshots are given just for reference purposes.

Factors that affect the Credit Scores

Broadly, there 5 factors that affect your credit score:

• Payment History – On-time payments of every debt helps in improving the credit score.
  
• High Credit Utilisation – If you continue to spend your total credit limit on the credit card, it impacts negatively the credit score.
  
• History of credit maintenance – The longer the history of your credit maintenance the better.
  
• Credit Mix – Having the right mix of secured and unsecured loans helps with the credit score.
  
• Multiple Credit Inquiries – Your credit history may get two types of inquiries: Soft Inquiry and Hard Inquiry. Soft Inquiries are harmless and do not affect the credit score. However, hard Inquiries impact the credit score.

Tips to Improve Credit Score

Now that we understand the factors that impact the credit score, let’s look at some of the tips using which the credit score can be improved.

1. Always pay your dues (EMIs, Credit card dues, etc. ) on time and pay the complete amount and not the minimum required amount.
   
2. Try to curb your credit card spending to 30% of the total credit limit. If this is difficult then enhance the credit limit.
   
3. Do not apply for too many credit cards or loans at one time. These are hard inquiries and they have a negative effect on credit score. It may indicate that there is a higher dependency on credit to take care of expenses.
   
4. If you have been paying your credit card dues and other EMIs on time then it helps in building a good credit score. Therefore it is recommended to not close old credit cards as it may impact the credit score adversely.
   
5. You may have two types of loans in your credit history: Secured and Unsecured. Credit Cards are unsecured whereas home loans or car loans are secured. Having only unsecured loans also has an adverse impact on credit scores.
   
6. If you have co-signed any loan or are a joint holder, then monitor the credit report very closely. If the actual borrower defaults and if you have co-signed, then it impacts your credit score as well.
   
7. A bounced cheque or SIP reversal does not impact the credit score. Do note that, credit scores reflect only your credit history. And they do not have access to your investments or savings accounts.
   
8. Check the accuracy of your credit report. Any misrepresented fact in your credit report can also hamper your credit score.

A good credit score is an indicator of your financial wellness. In some countries, it used for various other aspects like employment. Hence, being mindful of these details related to credit score can go a long way in your financial journey.