What Is A Credit Score? Know These Easy Ways To Increase Your Credit Score
In India, there are 10.38 crore1 outstanding credit cards as of June 2024. However, owing to its complexity, many people need to understand from scratch to answer -
What is a credit score, and how to increase the credit score?
Financing is a crucial need of the hour. The flow of credit is interlinked with many things, such as purchasing power, inflation, infrastructure, etc. The easy accessibility of credit also eliminates the unorganised lending facilities and seeks to safeguard money. When an individual is willing to take credit, the lender generally asks for a credit score.
What Is A Credit Score?
The numerical presentation regarding the creditworthiness of an individual is known as a credit score. It mainly includes details regarding credit repayment behaviour. A higher credit score indicates likelihood of paying loan back to the lender.
Credit Information Companies (CICs) issue this three-digit credit score. They have linked up with almost all the banks and data-sharing agencies. There are mainly four CICs (Credit bureaus) in India:
- Transunion CIBIL2 (formerly CIBIL)
- Experian3
- CRIF High Mark4
- Equifax5
Credit Assessment
The CICs procure data regarding loans and other liabilities of an individual to decide the creditworthiness. They calculate the credit score of an individual by considering mainly factors such as:
- Length of credit history - Previous instances of procuring or ongoing credits. The longer history indicates better credit management.
- Number of defaults - It accounts for situations when the borrower could not repay the credit. The fewer defaults indicates credibility.
- The severity of defaults - The amount or percentage of credit, left unpaid. The lower amount is favourable to satiate future credit needs.
- Repayment patterns - Periodic interval since the recent default with associated credit values. The older this default, the better the repayment pattern.
- Number of overdue accounts - The lower the number of accounts defaulted, the better the indicator.
- Current outstanding - Ongoing loan of the individual. The lower current outstanding indicates better repayment and management.
- Presence of write-off - Number of loans the bank had to write off due to default . The lower number of write offs indicates disciplined behaviour.
- A mix of credit - Different sources for credit, their tenure and viability.
- Recent loan inquiries - Number of times an individual has needed to procure a loan recently, and is enquiring about the concerned entity. The lower number of inquiries show lower or less frequent credit needs .
- Occupation, income, nature of work, address, and span of living in current addresses - It checks the current stability of an individual.
How To Know Your Credit Score?
As per RBI, CICS should provide easy access to one Free Full Credit Report (FFCR), including credit score, once every calendar year (January-December) to all individuals whose credit history is available with the CIC. However, an increase in digital finance infrastructure has helped receive credit scores at a fingertip. An individual can check his/her credit score from the concerned bank or credit bureaus. Mostly, it is available for free at least once.
Higher credit rates help in getting better interest rates or increased credit limits. However, there is less knowledge about the credit score and its improvement. Usually, people face the question - how can you increase your credit score?
Do not worry! Explore these simple and smart tips to learn the best ways to increase your credit score.
1. Loan Procurement
Individuals should procure loans from banks and financial institutions and plan them wisely. Only when one procures a loan his/her repayment or management behaviour is exposed. According to this behaviour, ratings are influenced.
Moreover, humongous expenses, like house purchases, car purchases, higher education, etc, can be easily facilitated with the help of loans. It also helps maintain liquidity for an individual. Loan procurement also benefits by increasing the length of credit history.
However, a person should wisely plan the repayment of this loan, as it will majorly affect the rating criteria. Moreover, a correct mix of credits should be planned by seeking various options.
2. Timely Bill Settlement
A credit score is the reflection of a borrower’s repayment behaviour. So, when an individual pays bills on time, his/her creditworthiness and reliability are reflected in the score. As observed, the checklist for credit assessment consists of various default-related points. So, when a person has impending bills, and they are paid on time, his/her defaults decrease along with an improved repayment track record.
3. Rental Payment History
Rental payment is not a direct point in credit assessment. However, an individual can increase their credit score by informing credit rating agencies regarding the timely repayment of rents. Like every other obligation, rent also accounts for a crucial part of payment. So, when this obligation is timely met, it showcases an individual's credibility for repayment. However, individuals can check with their credit rating agencies and inform the credit rating agencies if facilities are available.
4. Employment Stability
Stable employment stability ensures income generation, timely repayment, credit approval benefits, and a better credit mix. It helps in increasing credit scores by fulfilling credit assessment criteria. Also, an employed individual usually has the option to procure a loan from the employer company, which will improve the credit mix.
5. Plan Your Credit Mix
A credit mix refers to a bucket of various instruments to get credit. Having different credit options helps an individual diversify the repayment. The diverse credit options are home loans, personal loans, car loans, etc. Credit assessment has separate criteria to evaluate it. Also, it helps to show that an individual has the credibility to manage different loans.
However, one should properly understand the aspects of repayment frequency, source and its effect on credit score. Otherwise, having multiple credits without proper repayment or defaults can tarnish the borrower's profile and credit score. It can probably be the best way to increase your credit score.
Impact Of Credit Scores
Credit payment discipline can help an individual to maintain a potential credit score. It helps to reduce the interest rate for a particular loan and allows a better flow of credit. So, when an individual has a good credit score, banks or financial institutions will be assured of the repayment capacity and behaviour.
Thus, a potential credit score can open the prospects for easy procurement of loans. A credit score above 700 is considered good by Experian, CIBIL, and CRIF Highmark. Equifax considers a credit score of about 670 good. Check for your CIBIL reports for mistakes and rectify them.
Summary
Credit procurement is accompanied by a credit check and the generation of a credit score, for an individual. This score is a reflection of creditworthiness. It helps in easy financing and lower interest rates. However, borrowers should have disciplined management of credit and its repayment to improve their credit score.
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Frequently Asked Questions
1. How to improve your credit score if you have no debt?
Credit score assessment consists of various factors such as length of credit history, credit mix, defaults, repayment pattern, occupation, income, etc., which help ascertain the creditworthiness of an individual. So, to improve the credit score, an individual should first procure credit to maintain timely repayment, have a good credit mix, make a disciplined plan, and avoid defaults and constant credit requirements. Such regulated and credible behaviour would help individuals increase their credit scores.
2. What is a good credit score?
A good credit score depends on credit information companies (CICs). In India, four CICs rate an individual from 300 to 900. Moreover, a credit score above 700 is considered good by Experian, CIBIL, and CRIF Highmark. Equifax considers a credit score of about 670 good. The higher the score, the better the credibility. An individual should manage the credit well to increase the credit score.
3. What is a bad credit score?
A bad credit score may impact the rate at which a person can procure credit and also the limit for it. In India, there are four CICs, and they rate an individual from 300 to 900. Moreover, a credit score above 700 is considered good by Experian, CIBIL, and CRIF Highmark. Equifax considers a credit score of about 670 good. A score near 300 is a danger sign. As per the good score by four CICs, one should score above 600 to have good credit availability.
References
1. Reserve Bank of India <https://rbidocs.rbi.org.in/rdocs/ATM/PDFs/ATMJUNE20242BE0E594BAE0400EAD41F751AF675046.PDF>
2. CIBIL <https://www.cibil.com/faq/understand-your-credit-score-and-report>
3. Experian <https://www.experian.com/blogs/ask-experian/infographic-what-are-the-different-scoring-ranges/>
4. CRIF Highmark <https://www.crifhighmark.com/faqs>
5. Equifax <https://www.equifax.co.in/knowledge-center/>
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