Credit score: Know all the details that matter

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When looking for personal loan, or home loan, or even a credit card, we often come across a term ‘credit score’. Banks will tell you that it is easier to get a loan if your credit score is good or above 700.

What is a credit score, what are the slabs and how does the system work? Take a look.

What is credit score?

Credit score is a measure of an individual’s ability to pay back a loan amount. It is the numerical representation of their creditworthiness.

A credit score is a 3-digit number that falls in the range between 300 (the lowest) and 900 (the highest).

Credit scores are calculated by credit bureaus such as CIBIL and Experian. While computing credit score, several factors such as length of credit history, repayment records, credit inquiries etc. are taken into account.

Who are handling it?

There are mainly four credit scoring agencies in India. They are CIBIL, Experian, Equifax and Highmark. They use their own proprietary calculations and algorithms to estimate your best credit score.

Public sector and private banks check only CIBIL score before taking a decision to sanction you a loan or a credit card.

Therefore, a good CIBIL score is one of the most important factors that can help you get the best loan at cheapest rates and quickly too.

“Overall, nearly 35%-40% of first time loan application proposals are approved within 4-5 days. However, the approval rates differ based on the loan product asked for,” says Neeraj Dhawan, managing director of Experian India.

For those within the age group 35 and 46 years, credit score plays a crucial role in sanctioning the loan irrespective of the amount, added Dhawan.

Approximately 20% of the total loan proposal are rejected due to low credit score, shows Experian India data.

Score Range

A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit card or loan.

The average rate is:

Excellent: 900 to 800

Very Good: 799 to 740

Good: 739 to 670

Fair: 669 to 580

Poor: 579 to 300.

Any person having credit score above 620-630 is fair enough. But to get a quick loan sanction, or credit card, the score must be between 730 and 900.

How is it calculated?

Generally, credit agencies calculate the score depending on multiple criteria of the applicant. There are five main factors evaluated when calculating a credit score. They are: Payment history, total amount owed, length of credit history and types of credit and new credit.

Payment history contributes 35% of a credit score and shows whether a person pays their obligations on time. Total amount owed counts for 30% and length of credit history has a 15% contribution to calculate the score. The last two factors have 10% weightage each to calculate the total score of a person.

Check the score yourself

You can check this score online. All you have to do is visit a website of a financial service company, fill the details in the ‘Free CIBIL score calculator’ and get the estimated score.

Besides, one can always get your credit score free in a year at CIBIL’s official website (https://www.cibil.com/creditscore/) by following some simple steps by paying a token amount of money.

Score range for taking a loan

There is a certain score range for every individual who is taking a loan. No score is needed only for gold loan. For home loan one must have credit score above 650, but for car and personal loan the score must be 700. Else, one might not be considered eligible.

The bottom line

Your credit score is an important number that can cost or save you a lot of money in your lifetime. An excellent score can even give you a lower interest rate, which means you will actually pay less for every loan.

Therefore, you should pay your EMIs or credit card bills right on time. This practice will go a long way in giving a good score.