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All you need to know about Credit Scores

Navdisha Sehgal

| Updated: Apr 05, 2021 | Category: Digital Lending

All you need to know about Credit Scores

Credit scores refers to a 3-digit score between 300-900 and is given based on the information provided by individuals or companies to the credit information company.

The article talks about the credit score and how important is it for the borrowers to maintain a good score.

What is a credit scores? Why is it important?

A credit score refers to a number that ranges from 300-900 and helps in depicting creditworthiness of a consumer. The higher the score, the better a borrower looks to potential lenders.

A credit score is important as it shows the worth or dependability of a borrower. There is a direct relationship with the person’s eligibility for a loan. The credit scores held the lender to judge the risk in lending money to the borrower.

 An individual, as well as a business corporation, are given credit scores.

Background of Credit Scores in India

The Reserve Bank of India (RBI) has the power to license the company to access & manage credit information, and it has licensed four companies till now to perform these activities. In 2001, CIBIL started its activities and was the most popular credit information company in India.

The other three companies that monitor the credit scores include Equifax, Experian & High Mark. All these organizations have their scoring system.

The common thing in these companies is that they score one in case of no credit history or zero if credit history is six months old. These companies provide an in-depth credit report and credit scores based on the credit report.

What is CIBIL, and how it monitors a credit scores?

CIBIL stands for Credit Information Bureau (India) Limited. It is a Credit Information Company engaged in maintaining the records of all the credit-related activities of companies & individuals, including credit cards & loans.

The registered banks & the financial institutions from time to time submit their information to CIBIL. CIBIL issues CIR (Credit Information Report) and credit score, based on the information provided.

It helps the banks by providing data to the banks to filter the loan applications received in the course of their business.

What is the credit scores range?

The credit score range is a 3 -digit number that summarizes the credit history of an individual or a company. The credit scores range between 300 & 900, and it is important to maintain a high credit score. The higher the score, easy it becomes to get loan approval.

The credit scores range is listed in the tabular form below:

S.No.

CIBIL Score Range

Meaning

1

NA/NH

It stands for non-applicable or no history. When a person or company has not taken any loan or used a credit card, there will be no credit history.

2

350 – 549

It is considered a bad credit scores. It signifies that the concerned party is not paying the EMIs on time. It is difficult to get a loan or credit card as it is at high risk considering the credit scores.

3

550 – 649

This credit scores is fair. It suggests that the concerned party struggles to pay dues & the interest rates will also be high.

4

650 – 749

The lenders will consider this score as good and are willing to offer the loan.

5

750 – 900

This is a brilliant credit scores. It signifies that the concerned party is paying all the dues on time. It is easy to get loan or credit card approval from the bank, considering the score.

Thus, a good credit scores increases the chances of a good deal on loans & credit cards.

Why do lenders check the credit score?

The lenders check the credit scores to see the creditworthiness of the borrower.

The reasons are:

  • To see the credit history;
  • The capability of the borrower to repay the debt;
  • To see whether the borrower qualifies for a loan;
  • To review the risk & credit balance of the borrower; and
  • To decide the amount for the loan & the interest applicable.

How to check your credit score?

The following steps are to be taken:

Step 1 – Visit www.cibil.com and log in using the credentials.

Step 2 – Register to get your annual credit scores & report online.

Step 3 – Fill in the personal details such as PAN details, date of birth, etc.

Step 4 – Click on submit. Once the details are submitted, the applicant will receive an SMS & an email about the credit score.

Step 5 – Click on the link in the SMS or email. You will be directed to the CIBIL login page. Then enter the email id & the one-time password sent to you.

The report will open, and you can view it on the screen.

How does the credit score compute?            

RBI licenses four institutions to monitor the credit score.

These are:

  • CIBIL (Credit Information Bureau (India) Limited)
  • Experian
  • Equifax
  • High Mark

The credit scores are calculated after considering various factors that include:

ContentImpactDescription
Payment HistoryHighUnable to pay credit card bills & EMIs on time will significantly impact the credit scores.
Credit ExposureHighAvoid delayed payments and missed payments, as it will result in a negative impact on the score.
Credit AgeMediumAn extensive credit history leaves a good impact, as it allows the lender to insight your repayment patterns.
Types of AccountLowIt is advisable to have a good balance of secured & unsecured loans in the credit history.

Conclusion

Credit scores refers to a 3-digit score between 300-900 and is given based on the information provided by individuals or companies to the credit information company. It is important to maintain a high credit score as it ensures the easiness of getting a loan or credit card approval.

Thus, it can be concluded that the higher the credit score is, the more chances of getting loan approval.

Read our article:Tricks to Improve your Credit Score

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Navdisha Sehgal

Completed BA LLB from JEMTEC, School of Law, Greater Noida (Affiliated to GGSIP University, New Delhi). I have an experience of about 2 years in various fields of corporate laws, but I have a keen interest in researching on legal issues and to gain knowledge. I always strive to bring the best to work on what I do.

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