Lately your inbox may be flooded with offers to “check your credit score” or “click to get your free credit report”. We all know that your credit score is something important, here’s explaining the basics that you can’t afford to “not-know” in a way everyone can understand!
What is a credit score? And why should I bother with it?
Let’s begin with the basics. “Credit” is a loan you take, based on a trust that you’ll repay according to certain terms and within an agreed period of time. As you would imagine, anyone lending money to you would want to check up on this score to ensure they’ll get their money back on time. There are a number of factors that can predict the likelihood of a borrowers’ returning the money, based on factors and statistics. The sum of all these factors are used to come to a score, called a “credit score”, a 3-digit number that’s represents how you borrow money and how likely you are to repay.
Why should you bother about it? Because it may impact many aspects your life! Today credit scores are not only used to asses a borrower’s credit-worthiness, but also used by many companies to assess interview candidates and in some countries, insurance companies use them to assess insurance risk of potential customers. Your credit score determines your “credit worthiness” or simply put, your ability to take on future loans. The more you repay your existing loans on time, every month, the more your score will grow and the higher your likelihood of getting future loans.
Who gives these scores? And how are they calculated?
A credit bureau is an independent company that gets data from all lending institutions, analyses data and assigns a score to an individual based on his/her behavior on loans taken and their timely repayment. So, if you have a good stable income, repay all your debts on time (like loans and credit card bills), and have a healthy mix of loans to income (debt to income ratio), you will have a strong credit score.
There are four main credit bureaus in India; CIBIL Transunion, Equifax, Experian and Highmark, of which CIBIL is the oldest. Every financial institution in the country is mandated to share borrower’s data with each of these bureaus, who analyze the data and generate the score.
So, what’s a good score to have?
As per general norms, having a score above 690 is considered good, and above 720, excellent. It reflects that you have managed the loans you have taken in the past well, made all your payments on time, and closed your loan within the agreed period without any delays.
Oh no! Mine’s not too good. Can I fix this?
Yes! This is fix-able, over a course of time. You need to ensure you repay all your loan EMIs on time, every month, pay all your credit card bills and have a healthy credit mix in your portfolio. Repeated applications for new loans also lowers your credit score, so keep that in check your score and build your credit worthiness!