What is a credit score and ways to maintain a good score?

In today’s financial world, credit score is one of several important measures which describes a person’s financial situation. It is a three-digit numerical figure which will indicate just how credit-worthy you are, or just how good or bad you would be in managing debts and repayments. 

This score is normally between 300 and 900 and depends on features such as; payment history, credit utilisation, credit history, the types of credit and new credit inquiries.

Understanding credit score

Credit bureaus develop credit scores, which are quantitative digests of your financial activity. This number shows the lender how well you are likely to meet your loan obligations as and when they are due. A lower credit score portrays less risk to the lenders, hence, they enjoy sweet gains such as lower interest rates, quicker loan processing, and wider range of financing.

A positive credit check is essential for getting credit cards, loan options, and most of the economical goods. The monitoring of the factors that determine the credit rating and adoption of appropriate credit status will assist in achieving a desirable credit rating and earn significant benefits in the financial market.

Credit scoring models in India

In India, credit scores are generated by four major credit bureaus licensed by the Reserve Bank of India (RBI): CIBIL, Experian, Equifax and CRIF Highmark. Credit scores are calculated using different formulas by each agency, as such scores may vary between agencies greatly. All these companies are real, but they offer dozens of services to both individuals and businesses.

What are the many sorts of credit scores?

Here’s a more detailed look at the credit scoring systems employed by various agencies:

1. CIBIL score: The most recognised credit information reporting agency in India is known as Credit Information Bureau of India Limited (CIBIL) which developed the CIBIL score. The comparative proof-reading service efficiency can be rated from 300 up to 900; the results equal to or higher than 750 are referred to as outstanding. It is used by bank lenders to make assessments on the credit worthiness of borrowers.

2. Equifax score: Equifax has credit scores that can be anywhere from 300 to 900 with 750 and above rates being considered good. Like CIBIL, this score is determined by an assessment of that individual’s credit profile, the repayment behaviour and credit/income ratios.

3. Experian score: Experian is another credit scoring agency used frequently in India offering yet another credit score. It also ranges from 300 to 900 and anything above 750 is considered as excellent. The scores issued by Experian depend on factors like past record of repayment of loans and usage of credit card.

4. CRIF High Mark score: Like other credit bureaus, CRIF High Mark computes credit ratings based on the same factors. It has ratings from 300-900 of which anything above 750 are associated with superior credit standing.

How to interpret a credit score

In India, credit scores typically fall into the following ranges:

• 300-549: A low credit number which reflects a habit of paying bills a few days or weeks too early or a history of repaying loans and credit card balances.
• 550-649: A score in this range is considered to be below average and implies certain significant problems with debt.
• 650-749:It is a good credit score reflecting a good behaviour of a borrower in the management of his or her finances. Members in this cluster are in a better position in being credit worthy for loans and credit cards.
• 750-900: Such a score is good, meaning that the company is likely to have a good payback record and is always keen on credit worthiness. Individuals with such scores would get better conditions on loans and lower interest rates.

A credit score of 750 or more is considered as very good as you are able to borrow almost any sort of a financial product and you get the lowest interest rates.

Ways to maintain good credit score

• Timely payments: It is wise to pay all the bills, EMI’s and credit card bills in time.
• Low credit utilisation: The credit card holders should not exceed 30-40 % of their credit limit.
• Minimise credit enquiries: Try and avoid frequent new credit applications in order to avoid numerous hard enquiries.
• Maintain a long credit history: In another point of view, older accounts must be kept open for the more considerable credit record.
• Diversify your credit types: Applying jointly for secured and unsecured credit might help to improve your credit score.

Conclusion

A credit score is not just a figure; it is an opportunity for a financial future. Knowledge of how credit works and making efforts to work it properly will assist in enhancing your own position within the financial world and avail privileges like cheap interest rate, quick sanctions and good credit card. 

It may therefore be advisable to engage the services of a professional financial planner, in order to avoid poor financial choices that may lead to long term financial woes.