What Is a Credit Score How This 3-Digit Number Affects Your Finances

The credit score is a fundamental score showcasing our financial health and credibility. It helps lenders determine whether the borrower is financially trustworthy to lend a loan or not. A credit score is a measure of your credit usage and influences your loan eligibility, interest rate, and access to credit in India. Making timely payments, maintaining a low credit utilisation ratio, minimising applications, and getting credit reports can help you build up your credit score.

What is a Credit Score?

A credit score is a 3-digit number that rates the creditworthiness of an individual. It reflects whether the person is reliable enough for a loan, mortgage, or credit card. It is based on the credit history of the borrower, which includes active accounts, total debt, and repayment history.

A credit score ranges from 300-850. The higher the score, the better your creditworthiness.

Working of Credit Score:

Your credit score can have a huge impact on your life in general. Your credit score is an important factor that determines whether or not the lender provides credit to you. Lenders are more inclined to lend money to people who have high credit scores than low credit scores. This also helps you secure better interest rates, which could be beneficial for you in the future.

If you have a credit score of 700 or higher, it showcases very good positive financial health, which may result in a lower interest rate. Scores greater than 800 are considered excellent. Here are the general ranges of how credit scores are categorised:

• Excellent: 800–850

• Very Good: 740–799

• Good: 670–739

• Fair: 580–669

• Poor: 300–579

How is a Credit Score Calculated?

There are multiple factors involved in the calculation of a credit score, which are:

1. Payment History:

There is a 35% weightage of payment history, which includes whether you have paid your bills on time. It considers how many late payments you’ve had and how late they were.

2. Amounts Owed:

It is the percentage of credit you have utilised vis-a-vis the available credit. It is also known as credit utilisation, and its weightage is 30%.

3. Credit History Length:

If you have a longer credit history, then you are less risky for the lender, as a longer credit history gives more data to determine the payment history. Its weightage is 15%.

4. Credit Mix:

Credit mix demonstrates to lenders that you are capable of managing different kinds of credit. Credit mix includes instalment credit, such as automobile loans and mortgages, and revolving credit, such as credit cards. It accounts for 10%.

5. New Credit:

New credit is viewed by lenders as an indicator that you are in need of credit. The recent opening of several new lines of credit will negatively affect your credit score. Its weightage is also 10%.

How much Credit Score is a Good Score?

A good credit score is defined entirely by the lender. The ranges differ according to different credit scoring models. In general, credit scores between 580 and 669 are rated fair; 670 and 739 are rated good; 740 and 799 are rated very good; and 800 and above are rated excellent.

How to Improve My Credit Score?

Your credit score changes as your financial information gets updated at the end of the credit rating agencies. Here are a few ways to improve your credit score:

1. Pay your bills on time:

It requires six months of on-time payment to observe changes in your credit score.

2. Request a raise in your credit limit:

If you have credit cards, try calling the company and asking them to raise your credit limit. Since your account status is positive, your request should be granted. But remember, avoid spending the raised limit to keep your credit utilisation ratio low. While doing this, work on reducing your debt level.

3. Don’t close your credit card account:

If you are not using any particular credit card, then it is better to stop using that card rather than closing it. Depending on the age of the credit card and credit limit, it might negatively affect your credit score.

Can Viewing Your Credit Reports Impact Your Credit Scores?

No, viewing your credit reports and/or scores will not have any impact on your credit scores. Viewing your own credit report will be listed on your credit report each time, but it is a soft inquiry into your credit reports. Soft inquiries do not impact your credit scores.

Key Takeaways:

A strong credit score is not merely a number but a financial asset. With the right strategy, you can leverage this score for good-quality NBFC loans with attractive interest rates. 

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