What is credit score?
Credit score (or cibil score) is a number from 300 to 900 present in your credit report. It is a measure of your creditworthiness. The higher your score, the easier it is for you to get approved for a credit card or loan.
In India, your credit report is generated by 4 RBI-regulated credit bureaus : CIBIL, Experian, CRIF Highmark, and Equifax.
Why is credit score important?
A credit score is important because it is widely used by financial institutions and lenders to determine the creditworthiness of an individual. A good credit score can have several benefits, including:
- Better interest rates: People with good credit scores are often offered lower interest rates on loans and credit cards, which can save them money over time.
- More loan options: People with good credit scores have a wider range of loan options and are more likely to be approved for loans with favourable terms and conditions.
- Easier access to credit: Good credit scores can make it easier to get approved for credit cards, personal loans, mortgages, and other types of financing.
- Lower insurance premiums: In some cases, insurance companies use credit scores to determine insurance premiums. People with good credit scores may be offered lower premiums.
- Better rental opportunities: Landlords and property management companies may check credit scores when considering a rental application. Good credit scores can make it easier to secure rental housing.
What is good credit score?
Credit scores are usually categorised as follows:
- Excellent: 750 or above
- Good: 700 to 749
- Fair: 650 to 699
- Poor: 600 to 649
- Bad: below 600
These categories can vary slightly depending on the credit scoring model used, but this is a general guideline.
A score in the excellent range generally means that you have a strong credit history, a good track record of paying your debts, and a low debt-to-credit ratio. This can make it easier to get approved for loans, credit cards, and other forms of financing with favourable terms and conditions.
A bad score means that you have a very poor credit history, and it will be difficult to get approved for loans and credit cards. If you are approved, you will likely be charged extremely high interest rates.
It's important to note that these categories are a general guideline and may vary depending on the specific scoring model used by a lender or financial institution.
How to build good credit score?
To build a good credit score, you can follow these steps:
- Make all your payments on time: Late payments can have a negative impact on your credit score, so make sure to pay all your bills on time.
- Keep your credit utilization low: Try to keep your credit card balances low and don't max out your credit cards.
- Don't close old credit card accounts: Length of credit history is a factor in determining your credit score, so don't close old credit card accounts.
- Avoid applying for new credit frequently: Every time you apply for credit, a hard inquiry is made on your credit report, which can lower your credit score.
- Monitor your credit report regularly: Regularly check your credit report for errors or unauthorized activities, and dispute any inaccuracies.
What is Credit Bureau?
A credit bureau is a company that collects information about a person's credit history and maintains a record of it in a database. The information in the database is used to calculate a person's credit score, which is used by lenders and other organizations to assess creditworthiness.
Credit bureaus gather information about a person's credit history from various sources, such as banks, credit card companies, and other lenders. This information includes details such as credit card balances, loan payments, and any late or missed payments. The credit bureaus use this information to create a credit report, which is a comprehensive record of a person's credit history.