Your credit score is a three-digit number (often between 300 to 900) representing your creditworthiness to a lender or any other credit provider. Whenever you make an application for credit, be it for a home loan, car loan or even a credit card, the credit provider will refer to your credit score to assess how much of a risk they run in lending money to you. Clearly, then, your credit score is an important number in your life. It can significantly impact your ability to meet your life goals, such as being eligible to borrow money to purchase a home.
How to Check Your Credit Score?
OneScore app is a convenient place to check your credit score and report regularly for free. The easy-to-use app does not spam you with unnecessary messages or unwanted advertisements. It gives you the information you seek in addition to personalised tips for improving your credit score using an AI-based score planner.
How is My Credit Score Calculated?
A credit score is usually calculated by a Credit Information Company (CIC) or a credit bureau based on the information listed on your credit file or your past financial behaviour.
There are four RBI-approved CICs or credit bureaus in India:If you own a credit card or have ever taken a loan, you'll have a credit file maintained by each of the authorised credit information companies or bureaus. This file is regularly updated with your latest information to give creditors an accurate picture of your financial behaviour.
To calculate your credit score, each credit reporting company applies a slightly different formula or algorithm to the information contained in your credit report. The result is a number that's representative of your creditworthiness and past financial behaviour.
What is a Good Credit Score?
The ballpark range for a good credit score is somewhat similar across the credit bureaus. While your score can range between 300 to 900, a credit score of 750 is generally considered good across the four bureaus. Anything above that is even better.
You should also check your credit score and report regularly to keep track of your financial health on the OneScore app for free, without any ads and spam. It's worth knowing that your credit score is a dynamic number that changes according to the latest information on your file. Understanding the common factors used to calculate your credit score can help you maintain a good score and gradually improve it. Here are some of the top factors affecting your credit score calculation.
Top Factor Affecting Your Credit Score
1. Your Payment HistoryThis is the most important factor for determining your credit score and your eligibility for new credit. Even a single missed payment of your credit card bills or loan EMI can cause your credit score to drop. Such information is also highlighted on your credit report and treated as a red flag by lenders who'll think twice about approving you for credit if you have a history of defaults recorded on your credit file.
2. Your Credit Utilisation Ratio
Your credit utilisation ratio refers to the amount of credit you use with respect to your overall credit limit. You can calculate your credit utilisation ratio by using the following formula:Using a higher percentage of your available credit could lead to the inference that you're living beyond your means. It also helps to make all your payments in full whenever possible to keep your credit utilisation low.
3. The Length of Your Credit History
A clean and long credit history demonstrates a proven ability to manage credit. So even though you may be tempted to close your older credit accounts, do think about how it will affect the age of your credit history. An old credit card that you have been paying off diligently could help you maintain a high credit score by increasing the average age of your credit history.
4. Making Multiple Credit Applications
It's important to think twice before making multiple credit applications too close to each other.
• Each time you apply for a new loan or a credit card, a lender will pull out your credit report, also known as a "hard inquiry" or a hard pull. Such inquiries show up on your credit report, and each inquiry will reduce your score slightly. So applying to several lenders simultaneously could lead to multiple "hard inquiries" that can cumulatively reduce your credit score significantly.
• On the other hand, a "soft inquiry" is when you check your own credit score, using a free app like OneScore to monitor and track your financial health. "Soft inquiries" do not reduce your credit score or adversely impact your eligibility for a financial product.
5. Credit Mix
Having a “mix” of credit on your file is good, as it shows your ability to manage different types of credit products. Some common types are home loans, vehicle loans, educational loans, or even credit cards, which can help build your credit history when used judiciously.
When you apply for new credit, lenders evaluate your open credit accounts and how you manage them. A healthy mix of long-term and short-term credit shows your ability to manage your finances. Generally, a long-term loan like a home loan carries more weightage and indicates higher stability than a personal loan or credit card.
What Are the Benefits of Maintaining a Good Credit Score?
There are several benefits of maintaining a good credit score:• Various credit providers reserve their best rates for borrowers with a good credit score. So, when you apply for a home loan or a personal loan with a good credit score, you can expect to pay a lower interest rate than someone with a poor credit score.
• A higher credit score also means you are a creditworthy borrower. This indicates to the lender that you're less likely to default on a loan, increasing your chances of approval for a new credit product.
• Your credit score also impacts your borrowing capacity. One of the significant benefits of having a good credit score is that lenders are willing to lend you more because you have a demonstrated history of paying back what you borrow on time.
To Wrap Up
Overall, it pays to have a good credit score by making you eligible for special discounts and interest rates from credit providers. Therefore, it's advisable to check your credit score regularly and take steps to improve it if you find your score is less than satisfactory.
Moneycontrol journalists are not involved in the creation of the article