November 10, 2024 · 10 mins read
Santosh Kumar
An individual's credit score makes a big difference in their financial experience. You cannot skip talking about credit scores when you talk of banking, loans, credit cards, etc. But what exactly is this score, and why is it essential in a person's financial life?
A credit score is like a grade given to you based on your past performance in handling your finances, particularly credit. This includes all forms of credit such as different types of loans and even your personal use credit cards. Based on various parameters, your handling of credit is judged and marked, and finally, you are assigned a score. The credit score of a person can range anywhere between 300 and 900. A low score reflects poor credit handling in the past and adversely affects your future borrowing capabilities. The higher your score is, the better it is for you.
The credit score is also commonly known as the CIBIL score. This is because TransUnion CIBIL is a prominent credit bureau in India that has been handed the responsibility of calculating people's credit scores. There are four other Credit Information Companies (CICs) in India: CRIF Highmark, Equifax and Experian.
Read More:: What is the Use of CIBIL Score?
We have informed you that your CIBIL score is of utmost importance in the context of your financial experience. Let us now delve deeper into why exactly this number is so important and how it impacts an individual and their borrowing capabilities:
The topmost reason everyone is advised to maintain a high credit score is because it directly impacts your ability to obtain loans. From home loans, car loans, and personal loans to loans for establishing and expanding businesses, people can require a loan for a lot of different reasons and purposes. But have you ever wondered why every applicant doesn't get approved for a loan? The reason most often is their low credit score.
Whenever a person applies for a loan, the lender immediately takes a look at their CIBIL score. This is because this number is a reflection of the creditworthiness of the applicant. If the applicant has a very low score, the lender learns that they have not been responsible for using credit in the past. Naturally, they find it difficult to trust such an applicant with their money. The risk of default payments is increased, and thus, the application gets rejected.
On the other hand, a high score builds up a lot of trust in the lender. They know you can be trusted to repay the dues on time, so your loan application is easily approved. Therefore, your credit score directly impacts your eligibility for loans.
Let's say you somehow manage to obtain a loan despite having a poor credit score. The terms on which you will be provided the loan will still be highly unfavourable for you. This means you will have to face extremely high interest rates, make do with a smaller loan amount, and get a shorter tenure to repay the loan. All this makes the loan hard on your budget.
Read More:: What is the Use of CIBIL Score?
Just like your CIBIL score is a major deciding factor for banks while approving your loan application, it also matters for your credit card providers. Once again, the bank must know you will pay your credit card bills on time. It is difficult to have this faith if your credit score shows you have a habit of making late payments or have many default payments. A good credit card score helps you be eligible for a credit card.
A credit card comes with wonderful benefits. It makes spending easy and convenient, and a good credit card also makes your purchases rewarding. You can also enjoy reward points, discounts, cashbacks, and exclusive offers. This experience can get even better if you have a high credit score. Credit card providers often give such consumers higher credit limits and many more advantages.
Now you know how important it is to maintain a good credit score. However, many people are confused about which score is considered a good credit score. We will help you out.
The first thing to know is that there is no one specific score that has been marked as a "good" credit score and that all financial institutions agree upon. Each bank and lender will have credit score requirements for providing credit services. That being said, there is still a general division of credit scores into five ranges to help you decide where your particular CIBIL score falls, what it means, and how it will impact you. Let us have a look:
If someone's CIBIL score is between 300 and 579, it would mean they have the worst possible CIBIL score. Such a low score tells that the individual has been highly irresponsible in handling credit in the past.
With a score as low as this, it is almost impossible for the person to be approved for getting more credit in any form. They must take immediate action to improve their credit score to be considered eligible for applying for loans and credit cards.
Getting your credit applications approved will be challenging if your credit score falls within this range. Lenders will be dubious of your repayment capacity. A borrower with this score is considered to be high-risk by most lenders.
You need to take your score higher to be able to enjoy credit services in the future.
Read More:: How Students with No Income Can Get a Credit Card
Having a CIBIL score of 670 or above puts you in a more relaxed position as a borrower. This is because any number above 669 is considered good by most lenders. They view such an applicant as a low-risk borrower. In other words, you are seen as trustworthy. With this score, you can be assured of getting your credit card and loan applications approved by most lenders.
Individuals whose credit score falls between 740 and 799 are considered highly trustworthy by banks and other lenders and find it extremely easy to get approved for additional credit. This score reflects that they have been very responsible with their available credit and are punctual with repaying their dues. Lenders not only readily approve their applications but are also open to negotiating the terms at which they provide the credit.
Having a credit score of 800 or higher is the most desirable. It is considered an excellent score beyond which almost no improvement is required. Lenders see borrowers with such a high score as their prime borrowers.
While there is almost no doubt about their credit applications being approved, they can also rest assured of enjoying additional advantages such as lower than usual interest rates, higher loan amount and credit limits, longer loan tenures, exclusive credit card deals and offers etc.
Read More:: CIBIL Score Role in Loan Application Process
In case you have a very low or poor credit score, you must take steps to increase it so that you can enjoy the benefits mentioned above. An individual's CIBIL score can be changed but it must be noticed that the change will not happen instantly but over some time. Consistency is the key. Here are some things you can do to take your score higher:
1. Clear Existing Debt: This is the most important step for improving your CIBIL score. Existing debt is a bad sign for lenders and lowers your credit score. Once you clear them up, you will notice an improvement in your score.
2. Make Payments on Time: Make sure you repay your loans, credit card, and EMI bills on time. Once you do this consistently for some time, your credit score will go up gradually.
3. Keep Credit Utilisation Ratio Low: Credit utilisation ratio means how out of the total available credit a person uses. Keeping this ratio as low as possible shows lenders that you are not heavily dependent on credit.
4. Maintain a Healthy Mix of Credit: You should keep a good mix of all types of credit, as this will help you improve your credit score. This means you must try to have both secured and unsecured credit.
A credit score is a number falling between 300 and 900 that helps lenders decide an applicant's creditworthiness. In India, credit score, also known as CIBIL score, is calculated by four credit bureaus based on various parameters that are used to judge people's previous credit handling. People must ensure a good credit score because it impacts their eligibility for additional credit (loans, credit cards, etc). It even impacts credit terms, such as interest rates, sanctioned amount, credit limit, loan tenure, etc. A score above 800 is considered the best, whereas a score below 579 is the poorest. 670-739 is a good score range and assures eligibility for credit. A score between 740 and 799 will further help individuals get credit and make it a little more favourable.
Credit scores are not constant and can be changed by repaying loans and credit card and EMI bills on time, keeping the credit utilisation ratio to a minimum, maintaining a healthy mix of secured and unsecured credit and clearing up any existing debt that one might have. Adopt these habits as they help one maintain high credit scores.
1. Is 500 a good CIBIL score?
No. 500 is generally considered a poor credit score and makes the individual ineligible for getting more credit. If your credit score is 500, you must take immediate action to improve it.
2. Is CIBIL score and credit score the same thing?
Yes, CIBIL score and Credit score are the same thing. A credit score is also called CIBIL score because CIBIL (Credit Information Bureau (India) Limited) is one of India's four credit bureaus entrusted with the responsibility of calculating people's credit scores.
3. How much CIBIL score is required to get a loan?
No one number is fixed by all financial institutions as necessary for getting a loan. Each one has its credit score requirements. However, a score above 669 is often considered to be good. It paints you as a trustworthy applicant and makes it easier for you to get a loan. A score higher than that will also let you negotiate for better interest rates and higher loan amounts.
4. How can to improve my CIBIL score?
If you wish to improve your CIBIL score, you must get into a habit of repaying all your dues on time and keep your credit utilisation as low as possible. If there are any default or pending payments, clear them up immediately and eliminate any written-off accounts you might have. Also, try keeping a healthy mix of secured and unsecured credit. All this will help you improve your credit score over time. Keep in mind that credit scores cannot be changed instantly.
5. Who calculates my credit score?
In India, your credit score is calculated by four Credit Information Companies (CICs), also known as India's credit bureaus. These are Equifax, TransUnion CIBIL, Experian, and CRIF Highmark.
6. Can I check my credit score on the CIBIL website?
Yes, you can check your credit score on the CIBIL website. You can do this for free once every year or get a paid subscription plan if you wish to check it more often.
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