November 5, 2024 · 11 mins read
Santosh Kumar
Creditors and banks take advantage of credit scores to judge the creditworthiness of individuals and businesses. Credit bureaus evaluate credit scores based on the credit history of individuals and business entities obtained from affiliated banks and other financial institutions. Experian, a multinational credit reporting company, is one of India's four major credit bureaus. Started in India in 2010, Experian evaluates both personal and business credit scores widely used by banks and financial institutions to understand credit behaviour, evaluate the repayment possibility, and decide whether to approve or reject a credit application.
Said that, let us explore more on what is Experian credit score is, what is Experian credit score is used for, and why it is essential for individuals as well as businesses.
It is a 3-digit score given to individuals based on their credit history, and the score ranges from 300 to 900. Five factors of your credit history are considered to evaluate your score, and each has a different percentage of contribution to your credit score. Let’s understand better.
1. Payment history: A good history of regular payment proves your financial responsibility, and this factor contributes to 35% of your Experian credit score. On the other hand, missed payments and partial payments will drag your credit score to a lower value. So, take steps to avoid late or partial payments. Reserve the amount required for the bill payments well in advance and also set reminders or automate payments to maintain a good payment history.
2. Credit usage: How much you depend on your credit has a 30% influence on the credit score formula. Using your credit accounts to their maximum limit signals that you highly depend on credit for your financial needs. So, ensure that you use only 30% of your credit limit, which experts recommend. Plan your financial needs and upgrade your credit account, if required, to maintain a healthy limit of credit usage.
3. Length of credit history: The more the credit history is, the better the credit score is, and lenders will have a good amount of data to evaluate your creditworthiness. This factor has a 15% contribution to your credit score, and hence, try to keep your older credit accounts active; if required, opt for degrading to a lower value instead of closing them.
4. Credit mix: It has a 10% contribution to the score and clearly shows how good you are at responsibly handling various types of credit products. To boost this factor, you can opt for various credit products instead of paying cash whenever a need arises.
5. New credit: This factor has a 10% negative impact on your score. If you apply for new credit products, the lender will check your credit score, and that is marked as a hard inquiry, which is a negative aspect regarding the credit score formula. Multiple hard inquiries in recent times show that you are in a financial crisis and desperately in need of money.
Various Experian credit score ranges signify various levels of creditworthiness as follows.
1. NA/NH: No credit score represents that you are a newbie to credit and do not have a credit history. Hence banks may consider other factors like collateral or income to offer you a loan or credit card.
2. 300-549: This score limit is considered a poor score. Payment defaults, poor credit utilisation and other financial mistakes might have brought your credit score to such a lower level, and lenders will consider approving loans or credit cards to you as a high risk.
3. 550-649: This is a fair credit score with some credit mistakes in the past. Still, lenders may consider you as risky and may approve a loan for smaller amounts or at higher interest rates or may ask for collateral.
4. 650-749: This is a good credit score limit and you will be considered financially responsible by lenders and may approve your credit application faster and with ease.
5. 750-900: This is the best Experian credit score range and is a great proof of your creditworthiness. Hence, lenders will be ready to approve your credit applications and may offer you better deals.
Experian credit score plays an important role in the loan and credit card approval process. Lenders and banks consider your personal credit score to make lending decisions when you apply for any credit product. A good credit score will make your credit approval easier and faster. Moreover, the lenders may provide you with the best deals, especially larger amounts and lower interest rates.
Some employers may check your credit score before selecting you for roles that involve financial responsibility.
Like individuals, business entities also have Experian credit scores to help lenders evaluate the business's financial health and, thereby, their creditworthiness. The score ranges from 0 to 100, with 100 being the best score that represents the best creditworthiness. A score of more than 75 is considered less risky by lenders.
To avail of business credit, credit bureaus should see your company as a business entity. Incorporated companies and LLC (Limited Liability Company) with a federal Employer Identification Number will be considered as a business entity. You should open a business bank account in your business name to avail of business credit.
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Business credit score is calculated based on various business-related factors.
1. Credit Information: Credit information like credit utilisation ratio, repayment history, unpaid balances and number of trades of a business are considered while evaluating the credit score. While for individuals, this information is collected from lenders, for businesses this information is obtained from both the suppliers and lenders. Trade data will appear on your credit report for around 3 years. Not all lenders and suppliers will submit the payment reports to all credit bureaus. If your supplier doesn't report to Experian, then those details will not be included in your Experian credit report for calculating your business credit score.
2. Public Records: Bankruptcies and any judgment against the business will have a negative impact on your business's Experian credit score. Any of these factors that occurred recently will have more impact. Also, the number of occurrences and the monetary value are also taken into account. This information will be gathered from the local, state and country courts and corresponding authorities. Bankruptcies will appear in your credit data for 9 years and nine months, judgments for 6 years and nine months and tax liens for 6 years and nine months.
3. Demographic information: There is no wonder that the company's background information will have either a positive or negative impact on your business credit score. The size of the company, years on file and SIC code details will be considered and these details are obtained from corporate financial information and other filing offices.
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1. Experian’s score falls under 3 categories.
2. 1 to 25 is high risk
3. 26 to 75 is a medium risk
4. Above 75 is low risk
Lenders will consider your business credit score instead of your personal credit score while you apply for business loans. A good credit score will motivate investors to invest in your business. Thus a good Experian business score will help you avail funds for the development and improvement of your business.
Experian business credit score also helps businesses evaluate the creditworthiness of their suppliers or customers. If you are a manufacturer or a company that offers service, you can check the business credit score of your client to evaluate the reliability of receiving the payment. You can check the business credit score of any company before taking up projects or entering into a partnership to reduce your risk level.
On the other hand, your potential suppliers and customers will be checking your business credit score to come to a conclusion on whether or not to develop or extend the business with you. So, it is essential for businesses to maintain a good credit score as it not only helps you avail of credit products and funds but will directly change the game of your business.
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Whether you want to improve your Experian personal credit score or your business credit score, following these steps will help you.
1. Ensure you pay all the bills fully and without any delay because late payments, missed payments and partial payments will damage your credit score. Set reminders to make timely payments and budget wisely to avoid a shortage of cash for making the payments.
2. If you are a newbie to the credit journey or trying to build an Experian credit score, then avail credit products from lenders who report to the Experian credit bureau. For businesses, check whether your supplier is reporting to Experian. If not, you can suggest they send reports to Experian so that your payments to your supplier will be considered in calculating your business credit score.
3. Ensure that you use your credits only up to 30%. Using credit to the fullest limit will impact your credit utilisation ratio and, thereby, your credit score.
4. Check your credit reports periodically to ensure everything is correct and up-to-date. Any wrong information, be it personal details or credit details, may bring down your credit score. Take immediate action and notify the corresponding authorities to correct the report.
5. Make it a practice not to apply for multiple credit products simultaneously. For each of the applications, the lender will check your credit score which results in hard inquiries, one of the biggest damage factors of the credit score.
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A good credit score is the key to easily and quickly getting your credit product application approved, whether as an individual or a business entity. With a good score, you will be offered the best credit deals. Maintaining a healthy credit score is easy and needs financial discipline. You can easily build your score with wise budget planning, prompt payments, and proper use of your credit products. Check your Experian personal or business credit score, take steps to improve it if it is low, and be ready to avail credit products when emergencies occur.
What if I use my personal credit for my business?
If you use your personal credit for business, at any point in time if your business is at risk, then your personal credit score will also be at risk. Hence, having separate credit accounts for personal and business use is a wise choice.
Why are my Experian and CIBIL scores different?
Each credit bureau has its own formula to evaluate the credit score value. Hence, you may get different Experian and CIBIL scores for the same credit report. Another reason for different Experian and CIBIL scores is that not all banks and lenders report their customers' financial activities to all the credit bureaus. Hence, there are chances that your credit history may be different under different credit bureaus.
Do banks and financial institutions consider Experian or CIBIL scores?
It depends on the policy of the bank or financial institution.
If I take steps to improve my Experian Score, will my other credit scores improve simultaneously?
Yes. The factors that are considered in calculating the credit score by different bureaus are almost the same, but the weightage given to different factors will vary. Hence, if you take steps to improve your Experian score, there will be an increase in other credit scores, too, but in a different ratio.
Why are my payments made to a particular supplier not listed on my Experian credit report?
If only one payment detail is not listed, then contact the corresponding authorities to solve the dispute. If all the payments made to that supplier are not listed, then it signifies that your supplier is not reporting to Experian. Check with the supplier. Your Experian credit score will be calculated only by considering the payments the lenders and suppliers reported.
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