Credit Score 101: Everything You Need to Know

Are you in the process of applying for a loan? Then every article you might have come across must be stressing the importance of your credit score. So, if you are confused about what this score means or why it matters to lenders, here is all you need to know!

What does this term mean?

RBI-authorised credit bureaus such as TransUnion CIBIL record your credit history. They maintain your repayment records, ongoing debt, details of your credit mix (secured and unsecured loans, credit cards etc.), and your credit utilisation ratio.

With your credit history, credit bureaus generate:

1. Your credit report, a summary of your credit history
2. Your credit score, a numeric value between 300 to 900

What affects its value?

Now that you know where your credit rating comes from, you can see that it’s just a condensed representation of your credit habits. So, ultimately, how efficiently you manage your credit determines how high your score will be.

Think of it as a value on a meter that measures your creditworthiness. If you pay your EMIs punctually and have a good credit utilisation ratio, the value will go up. But be careful- if you default on making payments or have too much ongoing debt, it will decrease!

Why do lenders check my credit report and score?

When you approach a lender for a loan, they will first assess how reliable you are with debt repayment. And this is where this 3-digit value comes in handy! By looking at your credit report and score, lenders can measure your repayment capacity.

A high CIBIL score indicates responsible credit behaviour. Therefore, with a healthy credit record, lenders will approve your applications quickly, may extend you a high loan amount, and even offer you more affordable interest rates.

In comparison, a low score can make lenders hesitant to give you a loan or charge you higher interest rates.

So, what is the ideal score?

It’s a myth that lenders expect a perfect score of 900. Certainly not! A CIBIL score of 750 or above is deemed excellent. Here is a table outlining what different ranges mean:

What if I have a bad credit history? 

Fundamentally, it is your credit discipline that decides your score. So, by managing your credit responsibly, you can improve it in a few months. Here are a few tips:

• Pay your EMIs and credit card bills timely.
• Regularly review your credit report and fix any discrepancies you find.
• Have a balanced mix of secured and unsecured credit. Avoid having too many active unsecured loans.
• Use your credit card frequently, but responsibly. Keep your credit utilisation under 30% of your credit limit. However, don’t stop using your card altogether.
• Avoid having multiple ongoing loans or active credit cards.

Final thoughts

So that was all you needed to know! Now you can go ahead and perform a credit score check. Make sure you monitor your credit report and score regularly. Clear pending debts, use credit cards wisely, and make timely loan repayments, and you will maintain a healthy credit record.