A credit score is a 3-digit rating (ranging between 300 and 900) that lenders use to determine whether an individual is eligible for a loan or a credit. This rating is generated by leading credit bureaus of India like TransUnion CIBIL, Equifax, Experian India, CRIF High Mark etc. Most of the financial institutions use TransUnion CIBIL’s score to underwrite loan applications.
A good credit score can get your loan approved faster and a bad one can equally ruin your financial standing in future. This is the reason why a credit score plays an important role in all the major financial decisions of your life.
In accord with one of the leading credit bureaus of India, TransUnion CIBIL – 79 percent of loans are approved for individuals having a score higher than 750. If a credit score is 700 or above, it is considered to be a good score. A good score can enhance your loan approval and provide great benefits on interest rates.
Some of the major factors which make and break a credit score are – credit history, credit balance, payment history, and recent new credits and so on.
Let us take a look at the 5 major factors which highly influence a credit score. Your loan approval can be a seamless process if you can manage these factors well.
Outstanding balance: Your outstanding balance is a factor that needs to be balanced well. Because it is used by the lenders to determine your credit utilization rate. It is a ratio of your outstanding credit to your actual credit limit. Many people misunderstand this ratio and keep their outstanding debt at zero. However, if lenders see the debt at zero, they might think that you are not capable of paying the loan and eventually you are not taking any credit. It would be ideal to keep the debt less but not nil.
For example, the credit limit of an individual is Rs. 80,000 and the outstanding credit balance is Rs. 25,000. It is a better deal than having a balance of Rs. 65,000 against a credit limit of Rs. 80,000.
Payment history: This is the most important factor that makes your credit score. The payment history in your credit score determines whether you have done all the payments on time. In case you delayed in paying a bill, how much delay it was. Because the later you took, the more negative impact it creates on your credit report. This factor can be a major threat to your score if it displays any collections in your account.
Types of credit (secured vs unsecured): Various types of credits include home loan, property loan, credit cards, and personal loans and so on. Multiple credits create a positive impact on the credit score. This does not, in any way, should mean that one should create an account in all the individual variations. Because the credit utilization ratio needs to be maintained as well. If you won’t be able to keep the ratio, multiple credits are of no use.
If you are new to credit: There may be cases where the borrower has never entered into the credit world. Or if the last credit taken was more than 24 months ago, then his score would be -1. The allotment of credit score begins with (-1) to (0 – which is after completion of first 6 months) to (between 300 and 900). In case you are new to credit, we would highly recommend you to either start with one credit card or one secured loan or an unsecured loan. And if you manage all these smartly by paying them on time and in full, you will develop a good credit score after a certain period of time.
Recent new credit: Too many inquiries represent different behaviors. If it is for a Home Loan, say Rs. 1 crore, it shows that you are negotiating with Housing Finance Companies (HFCs). However, if it is for a personal loan or credit card in a very short period of time, it represents credit hungry behavior and will have a negative impact on the credit score. There are higher chances that you will be labelled as ‘a risky borrower’.
Vintage: Since how long have you been taking credit? If a lender finds out that you started taking credit for quite a long time, he will find out the month and year of credit. If you had borrowed for more than once, the average obligations will be taken into consideration. Not for forget, if you delayed in any of those payments, then how long you took to repay. So, if you have taken multiple credits for a long time, it is a positive step, but not if you failed to pay those on time.
(The writer is Founder & CEO Qbera.com. Views are personal)
Updated Date: Mar 27, 2018 11:47 AM