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What’s a credit score? And why it matters to you!

Naina Manjule, a Mumbai-based doctor, was surprised to find that her home loan application had been rejected because of a low credit score. This was the first time she heard of the term credit score. When she researched further, she found a lot of mistakes, unwarranted enquiries and a couple of non-closure remarks of consumer loans in the past that had pulled her credit score down.

Naina is not alone in this journey. Many of us find out the existence of credit score when we apply for that first loan or a credit card.

So what is a credit score? It is like a mark sheet, that tells us of the performance of your past credit behaviour. It becomes a benchmark for lenders, banks, loan companies to decide whether you are creditworthy or not. Credit Information Bureau of India Limited (CIBIL) is the most used credit rating agency in India. Most banks and lenders in India have the credit score downloaded from CIBIL.com to arrive at a decision to grant you a loan or not.

According to CIBIL, “79% of loans are approved for individuals with a CIBIL Score greater than 750. Higher your score, the better are the terms offered by lenders.” The highest score one can get on CIBIL is 900, but it is extremely rare to cross 850. The lenders always advice people to keep their score above 750, then it is considered a good score. The closer you are to 900, the better are your chances of getting a loan with favourable terms and conditions. It is also important to understand that this score is a dynamic one, it keeps changing as you progress with your credit life, depending on your spending and repayment pattern.

The most important factors that lenders look at your credit score is how many loans you have had, your repayment history and the longevity of various credit held by you. The various forms of credit that go into the making of your credit score are home loans, car loans, consumer loans, credit card accounts and personal loans.

So what goes into the making of this score? CIBIL calculates the score based on the following parameters

Credit utilisation

By and large, the bankers and lenders advise a common person to keep the credit utilisation at 30%. That is, if you are worthy of ₹ 100 as credit, they say, you should not use more than ₹ 30 of that credit. Now, how much credit are you worthy? It depends on how much you earn.

Default

Defaulting of credit considers two aspects, complete default and how many accounts are past due – by how many days and by how much? By days past due, what it essentially means how many days have you taken after the payment deadline is over for you to pay your car loan EMI or credit card payment.

The number of inquiries

When you apply for a loan or credit card, the company you are applying with will extract your CIBIL score (they will need specific details from you to do that) to check your creditworthiness. This process is called inquiry. It is crucial for you to understand that nobody can make an inquiry on your credit score without your approval. If you find any unwarranted inquiry you need to raise a complaint with the CIBIL.com. The more inquiries you have in your credit score, you are seen as credit hungry, which may be a cause for rejecting you a loan.

Trade attributes

How long have you held a particular credit card or loan? What kind of debt have you borrowed? Is it a credit card or home loan? Do you have a good mix of credit or is it all credit cards? It is important to understand if you have only credit cards it is not seen as a good credit mix. You are considered to be creditworthy if along with a credit card, you have a car loan, or a personal loan or the most valued in this regard – a home loan. A combination of credit shows longevity in repayment records and makes a lender believe that you are a dependable person when it comes to repayment.

After Naina understood what a credit score is, she worked on removing discrepancies in her credit score and it improved her score tremendously. She managed to get a home loan and today she is on track with her payment and is all geared up to buy her new car by the end of this year. Do you know your credit score?

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