Credit Score Builder

What is a credit score?

A credit score or CIBIL score is a three-digit number that indicates your creditworthiness. It ranges between 300 and 900 in India, 900 being the highest. A good credit score reflects your ability to repay debts on time, which can help you access credit facilities like credit cards, loans, and mortgages with favorable terms and conditions.

How is credit score calculated?

Credit bureaus, such as CIBIL (Credit Information Bureau (India) Limited), Experian, Equifax, and CRIF High Mark calculate your credit score. These authorized bureaus use complex algorithms to calculate your credit score. It depends on factors like credit card usage, loans, and repayment behaviour. There is no fixed formula that is used for calculating a credit score. Different credit bureaus have different algorithms and hence, your credit score may vary for each credit bureau.

You can check your credit score on the above-mentioned bureaus’ website easily. You just need to enter your PAN card and basic information and you’ll receive your credit report. In India, you are entitled to one free credit report and score from each credit bureau once a year. You can also check your free credit score through Click Here.

How does credit card usage impact your credit score?

1. Payment history: The most crucial factor that impacts your credit score is your bill clearance history. Late payments would not only impact your credit score but may also cost you an additional late fee.

2. Credit utilization ratio: The credit utilization ratio is the percentage of the credit limit an individual uses. A higher credit utilisation ratio can indicate a high credit risk and can negatively affect the credit score. Typically, you should use less than 30% of your credit limit.

3. Credit history: Credit history is the length of time an individual has been using credit facilities, such as credit cards and loans. A longer credit history can positively impact the credit score.

4. Credit mix: Credit mix refers to the different types of credit facilities an individual uses, such as secured loans, unsecured loans, and credit cards. A diverse credit mix can have a positive impact on the credit score.

5. Recent credit inquiries: Recent credit inquiries can also affect credit scores. Multiple credit inquiries within a short period can negatively impact the credit score.

How to improve and maintain your credit score?

A healthy credit score is a must to obtain credit with favorable terms and conditions. To improve and maintain a good credit score, you must follow the below suggestions-

1. Avoid late payments or defaults: You must ensure timely payment of your credit card bills or loan EMIs to maintain and enhance your credit score. Defaulting on your deadline can impact your credit score negatively.

2. Stay within your credit limit: Credit card companies in India provide a credit limit on your credit cards. It is important to stay well within your credit limit to keep up with a good credit score. It is recommended to keep your credit utilisation below 30% of your credit limit.

3. Review your CIBIL report periodically: This is one of the most critical factors affecting your creditworthiness. You can check your credit report for inaccurate or incorrect information shown on your credit report. If there is a name mismatch or the changed address is not updated, you can dispute it to resolve the issue. This exercise will help you improve your CIBIL score.

4. Manage a good credit mix: A good mix of both secured & unsecured loans is essential for a good credit score as the risk factor will give you better credit in return. A healthy loan mix does not see applicants as risky borrowers, so banks stay out of trouble.

5. Avoid frequent or multiple inquiries: Do not apply for multiple loans at the same time. This shows your credit-hungry behaviour towards the lender. Frequent loan applications adversely affect your credit score and increase the likelihood of loan denials. Therefore, apply for a new loan only if you need it.

Frequently Asked Questions

Q.1: Can I get a loan without a credit score?

Ans: You can opt for a secured loan without a credit score. Paying off the loan on time will help you build your credit score, and make you eligible for an unsecured loan.

Q.2: What is a credit limit?

Ans: A credit limit is the maximum amount of credit a financial institution allows a customer on a credit card or line of credit.