Credit Score-The Backbone of the Global Financial System

 What is a Credit Score?

A credit score is a three-digit number that represents your creditworthiness. It's a numerical expression based on an analysis of your credit files, primarily sourced from credit bureaus. Lenders use credit scores to evaluate the potential risk associated with lending you money.  

Key points about credit scores:

• Range: Typically, credit scores range from 300 to 900.  
• Factors: Several factors contribute to your credit score, including:
• Payment history: This is the most significant factor, accounting for 35% of your score. Consistent on-time payments are crucial.  
• Credit utilization: This refers to the amount of credit you're using compared to your available credit limit. Keeping it low is beneficial. The ideal credit utilization ratio is generally considered to be below 30%.  
• Credit history length: A longer credit history generally indicates a more stable financial track record.  
• Credit mix: Having a variety of credit accounts (e.g., credit cards, loans) can positively impact your score.  
• Credit Enquiries: Applying for too much credit within a short period can negatively affect your score.  

Soft enquiries don’t impact your credit score. They happen when you or companies check your credit score for pre-approved offers. Whereas, hard inquiries can lower your credit score. Lenders perform them when you apply for loans or credit cards.

• Perks of a Good Credit Score: A higher credit score can lead to:
• Lower interest rates on loans: This can save you significant money over time.  
• Increased credit limits: This gives you more financial flexibility.  
• Easier approval for credit cards and loans: This can be helpful in emergencies or when making major purchases.  

But good credit score does not guarantee the loan/credit card approvals but it significantly increases the chance of getting a new loan or card approval. Banks and finance companies will consider some other factors along with the credit score. 

• Income and Employment: With this the financial institutions determine whether you can reliably repay the loan or not.
• Debt-to-Income Ratio: It shows how much of your income goes towards existing debt.
• Loan Amount and Term: This determines, whether you are borrowing responsibly or not.
• Credit History: Beyond your score, lenders look at your payment history.

How to improve your credit score:

• Make on-time payments: This is the most important step. Set up automatic payments if needed.  
• Keep credit utilization low: Try to use less than 30% of your available credit.
• Maintain a long credit history: Avoid closing old accounts unnecessarily.
• Diversify your credit mix: Consider applying for different types of credit.  
• Limit new credit applications: Only apply for credit when necessary.
• Monitor your credit report: Check for errors and dispute any inaccuracies.  

By understanding and managing your credit score, you can improve your financial health and access better credit opportunities.  

Major Credit Bureaus in India

• TransUnion CIBIL
• Equifax
• Experian
• CRIF High Mark

These agencies collect and maintain credit information on individuals and businesses.

How Often Your Credit Score is Updated?

Credit score by CIBIL, is typically updated every 30-45 days, but this will change from 1^st, Jan 2025, and this change will apply only to individuals.

The Reserve Bank of India (RBI) recently made it mandatory for lenders to report it fortnightly, on the 15^th and the last day of each month. Therefore, from next year, your credit score will be updated twice a month.  

What is considered a good credit score?

A good credit score in India is generally considered to be above 700. This means that you have a good credit history and are likely to repay your debts on time. A good credit score can help you get approved for loans and credit cards at lower interest rates.  

Here is a breakdown of credit score ranges and their general interpretations:

• 750-900: Excellent. This is the highest possible range and indicates that you are a very responsible borrower with a strong credit history.  
• 700-749: Good. This is a good range and indicates that you are a responsible borrower with a good credit history.  
• 650-699: Fair. This is a fair range and indicates that you have some credit history but may have some minor issues.  
• 600-649: Needs Improvement. This is a below-average range and indicates that you have some credit history but have had some significant issues.  
• Below 600: Poor. This is a poor range and indicates that you have a poor credit history and are likely to have difficulty getting approved for loans and credit cards.  

It is important to note that these are just general guidelines. Lenders may have different standards for what they consider to be a good credit score. However, a score above 700 is generally considered to be good and will give you the best chance of getting approved for loans and credit cards at favorable terms.