Credit scores have gained considerable significance in India’s financial landscape with an increase in adoption of credit instruments across diverse sections. Whether you’re planning to take a loan or apply for a credit card, your credit score determines your credit-worthiness.
The average credit score of Indians stood at 715 in the financial year 2021-22, as per a report by OneScore, a credit score monitoring platform.
“While a credit score of 715 is considered fair, there is enough room for improvement,” OneScore said in a statement adding that this number indicates a pressing need for a more responsible credit behaviour from people.
A high credit score can mean access to better borrowing terms and lower interest rates, but it also brings other benefits like lower insurance rates, access to better credit cards, greater options for buying houses or apartments and bragging rights!
What makes up my Credit Score?
A credit score is made up of information held by credit bureaus, which lenders use to determine your suitability for a product. Data which lenders use to make up your score are:
- Personal Information
First, lenders use the information you filled in the form you used to apply for the loan. This will include all the relevant information your lender needs relating to your income, employment circumstances, address, and so on. The most important factor is your income as it plays a crucial role to show how credit worthy you are – simply because if you are in a lower income bracket, you are more likely to have trouble repaying the loan.
It is important to ensure you fill in everything correctly and are as honest as possible about your situation. Some lenders also refer to the electoral roll to verify your personal information, so it is important to register on the electoral roll at your current address if you wish to apply for credit, whether or not you plan to vote.
Also Read: Loan Is Closed, But Not Updated In CIBIL
- Credit history
Your payment history will impact your credit score as lenders will try to assess how likely you will be able to repay any loan. That’s why it is important to make sure credit card and EMI payments are made on time. Even if you have not had previous business with the specific lender in question, your credit history will still be held by credit bureaus and so will be scrutinised.
If you have borrowed and repaid with banks successfully in the past, you are more likely to be seen as credit-worthy now – but if you have had a history of late payments, your credit application will be scrutinised a little more sceptically.
- Credit mix
Any existing credit agreements that you have in place will be considered. This includes existing credit cards, home and personal loans. Your credit utilisation – how much of each credit facility you use – is a factor that may impact your credit score, as different lenders look for varying levels of credit utilisation when deciding on lending criteria.
- Credit utilisation ratio
It indicates the proportion between your average monthly card usage and the approved credit card limit. Using more than 30% of the sanctioned limit shows overdependence on credit and impacts your rating adversely.
- Past behaviour with the lender
This applies if you are seeking credit from a lender you have already had business with; for example, if you are a customer of a bank, your financial circumstances can be looked at, and any past credit agreements can be checked.
- Credit inquiries
Too many hard inquiries (inquiries made by FIs for credit assessment) in a short time can negatively impact the credit score.
Credit scoring bands
Scores are categorised into the following credit scoring bands:
- Exceptional: 800 and above
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 579 and below
Most lenders consider a score of 700 or above to be a good credit score.
Six benefits of a high credit score
Lenders consider credit scores when deciding who they’ll approve for loans. So, one of the main perks of having a high credit is that the higher your score, the better your chances of being approved for any loan you apply for.
Here, then, are the rupee-and-paisa benefits to having a high credit score:
- Higher chances of approval: A high credit score indicates responsible credit behaviour, and a lower risk of default for the lender which typically increases your chances of being approved for a loan or a credit card
- Significant Savings on Interest: Borrowers with the highest credit scores generally have access to the lowest interest rates available on home loans and auto loans, and a lower rate means big savings.
- Higher credit limits: Once you’ve been approved for the loan you’re applying for, and you’ve managed to get the best interest rates you can for repayment, you’ll be in a great position to borrow more money.
- Negotiate better deals: When you have a higher score, it means that lenders will see you as more creditworthy, which gives you an upper hand when you want to negotiate better deals or additional opportunities to borrow.
- Save money on car insurance: Yes, your car insurance premiums can be affected by your credit score. When you apply for insurance the providers might want to check your financial history as part of it. What they find will impact on approval rates and costs, and can even impact on your premiums even after you’ve been accepted.
- Higher chances of approval for longer tenure loans: A longer tenure usually involves a higher degree of risk for the lender. However, a high credit score may help you with a longer repayment tenure on your loan than those with a lower score. When a loan is repaid over a longer tenure, it results in smaller EMIs, a lower monthly loan burden, and may help you manage your monthly expenses in a better way.
Conclusion
A credit score is a snapshot of your financial history, and is calculated by credit bureaus. Your credit score reveals your overall financial and credit health. If you stick to good credit habits and keep in mind that it’s normal for scores to fluctuate on a month-to-month basis, you can take satisfaction in long-term score improvement—and the many benefits it confers such as lower interest rates to higher loan availability and competitive insurance premiums.
