Credit Score| What These 3 Digits Tell About You?

What Makes up Your Credit Score?

Introduction

In this article, we will discuss what is credit score, what these 3 digits tell about you, how is it calculated, what makes up your credit score etc.

Credit Score | What These 3 Digits Tell About You?

Understanding Your Credit Score

• A Credit Score plays a critical role in the loan and credit card approval process. This is the first screening criterion applied by banks and financial institutions when reviewing your loan application.
• It helps in evaluating the potential risks that could arise from lending money to a consumer. Thus, the score is used to reduce the probable losses on account of bad debts.
• Credit Information Report (CIR) summarizes your payment history of loans and credit cards borrowed from all banks and financial institutions. Based on this credit history, a ‘Credit Score’ is generated. 
• In short, credit score is the statistical number which evaluates or represents the credit worthiness of the consumer applying for loan or credit card.
• Credit score has started getting reasonable attention in India. It is because an individual’s credit score is a key determinant of his likelihood to get big-ticket loans and the interest rate that will be charged on the loan. 
• CIBIL, Experian, CRIF and Equifax are the four credit bureaus in India that create credit score after examining credit report of individuals. CIBIL (Credit Information Bureau India Ltd.) is one of the premier agency which provides credit score namely, CIBIL score.

What is Your CIBIL Score?

• CIBIL score is a 3-digit numeric summary of your credit history. It is derived by using details found in the ‘Accounts’ and ‘Enquiries’ sections of the CIBIL report.
• It includes (but not restricted to) your loan accounts or credit cards, and their payment status, as well as outstanding amounts’ days past due.
• The score reflects your credit worthiness, based on your borrowing and repayment history, as shared by lenders. Your CIBIL score ranges from 300 to 900. The higher your CIBIL score and closer to 900, the stronger your credit profile.

What These 3 Digits Tell About You? How to Interpret your CIBIL score?

• CIBIL Score < -1 : No Credit History
• 300 < CIBIL Score < 600 : You are considered as a Credit risk for the banks and financial institutions. Your application for loan or credit card may not processed.
• 600 < CIBIL Score < 750 : This is the intermediate range, in which the lender may allow you for credit. However, the lender may consider your overall financial health and other risk criteria for determining your true credit value. These include stability of employment, other sources of income, loan security and similar factors.
• CIBIL Score > 750 : This range indicates the good credit worthiness of the borrower. Approval of the loan or credit card will not be a problem. A high credit score means you can leverage it to negotiate to get lower interest rates from the lender. The higher the CIBIL score and closer to 900, the stronger your credit profile.

Illustration : Two individuals ‘A’ and ‘B’ with Credit Scores of 810 and 620 respectively apply for a home loan. Depending on the credit policy of the bank, it is more likely that the bank will screen the individual ‘A’ with an 810 Credit Score for further proceeding of loan, while the application of ‘B’ with the Credit Score of 620 won’t proceed. Lender will check it for other risk criteria for determining his creditworthiness.

What Makes up a Credit Score?

There are four key factors that impact your CIBIL score

1. Payment history: Making late payments or defaulting on your EMIs has a negative impact on your score.
2. Credit mix: Having a balanced mix between secured loans and unsecured loans is likely to have a positive impact.
3. Multiple enquiries: Too many loan enquiries may have a negative impact on your score as it indicates that your loan burden may go up in the future.
4. High credit utilisation: A high credit utilisation limit indicates a rising debt burden over time and may negatively impact your score.