A credit score is a measure of an individual’s ability to pay back the borrowed amount. It is the numerical representation of their creditworthiness. A credit score is a 3 digit number that falls in the range of 300-900, 900 being the highest. You should always work towards reaching a credit score that is close to 900. A higher credit score offers you several benefits and helps you at the time of getting a loan or a credit card. Having a low credit score suggests you have not been a responsible borrower and have been slacking off repaying the borrowed sum. Credit scores are calculated by the credit bureaus in the country after taking into consideration several factors like the length of your credit history, repayment records, credit inquiries, among others.
How credit scores are created
The three main credit bureaus – Equifax, Experian, and TransUnion – create your credit reports, which credit scoring models like VantageScore and FICO use to come up with a score that typically ranges from 300-850. The credit bureaus can also calculate scores for you based on their own proprietary models.
Your scores are typically based on things like how often you make payments on time and how many accounts you have in good standing.
Your score will never factor in personal information like your race, gender, religion, marital status or national origin.
Who Computes Credit Score?
Your Credit Score is computed by Credit Information Companies. There are four companies in Indian that do the job– CIBIL TransUnion, Experian, Equifax, and High Mark. Let’s unveil the mystery around how these companies compute your score.
When you make a transaction—the one that is relevant to determine your score—banks send details about it to all four credit bureaus. To send details to all credit agencies is a mandate by the RBI. Essentially, banks keep Credit Information Companies up-to-date about your monetary habits. If a bank needs to check your Credit Score, they can approach any one of the bureaus. It doesn’t matter which one because all will have the same score for you– all four are equally authoritative and on par with each other.
After receiving information from the bank, credit bureaus get down to the task of collecting more information about your financial habits from other banks and financial institutions. The credit bureaus then process this information to formulate what is called a Credit Report.
Now, what is a Credit Report? A Credit Report is your financial marks card. It contains your Credit Score. It’s wiser to check your score from time to time.
Why Should I check my Credit Score?
It is very important that you keep a close eye on your Credit Score. It is the best way to gauge your chances to get a line of credit. Another reason why you should track your score is to know if it dips, or if an error has been made by credit agencies while calculating your score. This will help you make timely amends.
Do the Four Credit Agencies Compute Scores Differently?
Though the processes followed to compute your score might differ from agency to agency, your Credit Score calculated by all will be the same. This is because banks intimate the relevant information to all four agencies. Therefore, no matter which agency a bank picks to check your Credit Score, there will be no major discrepancy in it.
Of the four agencies, CIBIL, however, is the most popular since it was one of the first Credit Information Companies to start operations in India. This has fuelled the notion that CIBIL Score is more accurate than a score from other agencies. This, however, is not true. Banks give equal weight to scores from all four agencies. Equifax, Experian, and High Mark Credit Scores are as good to banks and other financial institutions as CIBIL Score.
BankBazaar has tied up with Experian, which means that we can help you check your Credit Score for free. Otherwise, it costs a few hundred rupees.
Credit Score Range and What It Means
A credit score ranges between 300-900. You should always take measure to bring your credit score closer to 900. A higher credit score increases your chances of getting a good deal on loans as well as credit cards. Let’s take a look at the different credit score range:
- NA/NH : In order to calculate your credit score, you need to have a credit history. If you have no credit history, your credit report will mention that your credit score is NA (Not Applicable)/NH (No History).
- 300 -549 : AA credit score in this range is considered as a bad credit score. It suggests that you have not been a responsible borrower and have defaulted payments and have unpaid dues.
- 550-649 : A credit score in this range is considered as average. You will need to take measures to improve your credit score.
- 650-749 : A credit score in this range is considered as good and lenders will consider offering you credit in the form of a loan or a credit card. However, you might still not be in the position to negotiate a good deal.
- 750-900 : With a credit score in this range, lenders will be willing to offer you a loan with cheaper interest rates. A credit score in this range also gives you the additional power to negotiate for a better deal on interest rates and credit cards with better rewards and benefits.
What Makes Your Credit Score Go Down?
It is understood that having high balances on your credit cards can significantly reduce your credit score. Apart from that, there are several other factors that can hurt your credit score:
- Being late on your credit payments.
- Completely ignoring your loan dues/credit card bills.
- Creditors charge off accounts when credit card bills are not paid on time. The status of having your account charged off is one of the worst incidents that reflects on your credit score.
- Lenders use third-party debt collectors to retrieve the loan amount from you, in case they do not receive payments. Having your account sent to collections reflects very poorly on your credit score.
- Filing for bankruptcy can have a devastating effect on your credit score.
- When you request to close a credit card that has an outstanding balance, your credit limit drops to Rs.0. This is similar to a situation where you have maxed out your credit card.
- Closing old credit cards shortens your credit history. This has a negative impact on your credit score.
- Applying for multiple credit cards or loans within a short duration makes your credit score plunge. Hence, it is advisable to limit the number of applications.
- Having only one type of credit account will negatively impact your credit score. So, you should look to maintain a mix of loans and credit card debts and make consistent payments on time.
- If you fail to check your credit report occasionally and fix errors, if any, your credit score can be hurt. It should be understood that credit reporting bureaus also make mistakes while creating credit reports. If you do not monitor and correct your report, it may cost you a lot in the future.
FAQs on Credit Score/ Credit Report
- Why is PAN card required for checking the credit score?
The PAN card is required for obtaining the individual’s score accurately. The credit score can also be obtained by using other valid Proof of Identity (PoI) instead of the PAN card. The PoI helps in identifying individuals in the database.
- Can credit score inquiries affect the score?
No, the inquiry will not affect your credit score. When you apply for a loan or a credit card, it can have a slight impact on your credit score but when you are checking your credit score it is not.
- Why do we need a phone number for credit score?
The phone number helps in identifying individuals accurately. Your credit report will already have your phone number, when you provide your phone number, it is verified against your records to ensure you are the right recipient for your credit score.
- Is there a limit to request for accessing credit score?
There are no limits to the inquiry of credit score. You can check for your credit score as many times as you need to. The inquiry for the credit score is considered as a soft check while only hard checks can impact your credit score.
- How the credit scores changes?
The credit score depends on the credit report changes, as and when the changes are made to the credit report, the credit score would change depending on the positive or negative impacts. For example, when you are applying for a credit card or loan, making payments towards the credit, it will impact your credit report and the score.
- What is the significance of credit score range?
The credit score range can vary depending on the assessor, however, the value will represent the same level of creditworthiness. The credit score summary will also indicate the health status, it will tell you if a particular score is excellent, good, average, or poor.
- What can be considered as a good credit score?
Credit score may vary based on the credit rating company. The credit report and score will provide you with an indication of whether you have a good or bad score. A good score with a particular assessor will more likely to have a good score with another assessor.
- What are the factors that are included in the calculation of credit score?
There are few factors that are considered while calculating an individual’s credit score. Primarily, the account information that includes information of credit cards and loans, the public records containing information pertaining to tax lien and bankruptcy, and the hard inquiries made by your lenders will be accountable for the calculation of credit score.
- Will the credit score be affected for owning multiple credit cards?
This will depend on your credit history. If you have multiple credit cards with a higher limit and you are under-utilizing or over-utilizing it, this can impact your credit score negatively.
- What type of information is included in my credit report?
The following information will be included in your credit card report:
- Individual’s name, address, and other personal details
- PAN card and contact number
- Credit history
- Credit cards/loans
- Payment patterns
- Lender’s inquiry details, and more
- What kind of information is not included in the credit report?
A credit report won’t contain any information related to your checking or savings accounts. Also, the information pertaining to criminal records, medical history, lifestyle, and other details are not included in the credit report.
- How long does the information remain on a credit report?
This will depend on various factors such as the inclusion of hard inquires, payment details, credit card, and loan applications. As soon any changes are detected, your credit report would change. The information is obtained on a monthly basis for the changes to be implemented. If you find any error on your credit report, you are recommended to get it corrected from the assessor.
- Is it possible to delete information from the credit report?
Unless it is incorrect, no details can be deleted from your credit report. The credit report provides an insight of your credit history and lending worthiness. Most lenders vastly depend on the credit reports to assess the lending risks.
- What do I need to do to if I find errors on my credit report?
If you notice any error or wrong entries in your credit report, you can get in touch with the credit report provided to get it rectified. The process is simple, you can get in touch with your credit report provider through phone, email, and other mediums.
- Is the Credit Information Report same as the CIBIL Score?
No, the Credit Information Report contains details of credit history and inquires, CIBIL, like various other credit rating companies have their own method of calculating the score based on the information on the credit report. The Credit Information Report has all the details of an individual’s credit date while the CIBIL score indicates the credit worthiness. The CIBIL score is derived from the information available in the Credit Information Report.
- Who can access my credit report?
Your credit report can be accessed by you, lenders, and government recognized regulating bodies.
- Why do lenders check the Credit Score?
The lenders refer to the credit score to determine the credit worthiness of individuals. It helps the lenders or the banks to understand the risk factors involved in lending out money to an individual.
- Can the CIC (Credit Information Companies) change or delete my credit information?
No, the CIC collects information from various financial institutions but doesn’t change any data. The CIC compiles information related to credit transactions and payment histories of an individual.
- What’s the credit score required for application of a credit card?
A score of 700 and upwards has a higher chance of approval for credit card application. The banks might hesitate to give you a credit card if the score falls under 700.
- How can I improve my Credit Score?
- In order to improve your score, you will need to know your credit score and get a detailed insight by obtaining a credit report. You can also incorporate the following tips for improving your credit score:
- Don’t keep applying for a credit if it’s getting rejected. If you keep applying for a credit, it will further impact your credit scores negatively. Every application demands a hard check on your credit report.
- Pay your credit card bills and loans within the due dates. Failing to pay the bills and EMI on time will be recorded in your credit report.
- Avoid the settlement of loan and credit cards.
- Keep your borrowing limit to the lowest possible.
- Review your credit report at least once a year to keep a tab on your credit score and patterns.
- What is the highest score you can get on Experian?
Experian’s credit score ranges from 300 – 900. 900 being the highest score.
- Why am I rated differently?
- There are instances where you can find yourself rated differently. India has four credit rating agencies formed and authorised by the Reserve Bank of India (RBI). They are CIBIL, Experian, High Mark, and Equifax. The parameters and the credit rating module used by each of these agencies will differ. The amount of importance placed on each of the considerations will also vary. For instance, payment history, which is one of the normally considered parameters, shall be weighed differently. As a result, you are rated differently.
In the formal banking system, the agencies garner the credit details of every customer from Non-Banking Financial Institutions (NBFIs) and banks. The information is massive. It includes details such as account history, payment history, deferred payments, missed payments, loan applications, loan approvals and disapprovals, credit accounts etc. You may transact with many bankers, licensed brokers, and NBFIs. All lenders may not report to the same agency. When you are picked up by different agencies, there can be a minute difference in your rating. All credit crores are equally valid.
- Experian Credit Score
- Experian was licensed in 2010. An individual is rated in the range of 0 and 999. 961-999 is considered excellent, 881-960 good, 721-880 fair, 561-720 poor, and 0-560 very poor.CIBIL Credit Score
- CIBIL was licensed in 2009. CIBIL uses advanced analytics. An individual is rated in the range of 300 and 900. Anything above 750 is considered good. The parameters include credit exposure, credit utilization, credit history, and credit type and duration.EQUIFAX
- EQUIFAX was licensed in 2010. An individual is rated in the range of 300 and 900. The parameters used include account categories, the number accounts, consumed and available credit, credit history, and the length of the payment history. Anything more than 750 is considered excellent, 700-749 good, 650-699 fair, 550-649 poor, and anything below 550 bad.HIGH MARK
- High Mark was licensed in 2010. The lowest credit score is 300 and the highest 850. An individual with a good score is considered more potential than an individual with a poor score.
How your credit score is interpreted is more important than just a number.How frequently should I check my Credit Score and credit reports?
- Checking credit reports once a year seems ideal unless you have some strong reasons to review them frequently. A free copy can be obtained via any of the rating agencies that compute the credit score of a customer using these reports. No information is shared among the agencies. In lieu of reviewing a single report, be advised to review all the reports at the same time if it was not done earlier. Check the details thoroughly and make sure they are error-free. Dispute the errors or the wrong information if any.
Credit scores can be reviewed based on your comfort zone. Checking yearly may seem adequate for some, but a majority of people prefer reviewing monthly or even weekly. Despite how frequently you check, your score should not be impacted. Be focused on the overall trends in lieu of daily trends. Credit scores can be frequently checked in the following circumstances:
- Applying for a new credit card
- Applying for a mortgage
- Looking for a job change
- Safeguarding against identity theft
- Establishing credibility
- What needs to be done if my Credit Score climbs up?
- A credit score tends to change from time to time. A lower score may turn higher or a higher score may turn lower depending upon your credit reports. A person can also maintain a consistent score. Being well-rated is always better for many reasons. You can have multiple checks. If you notice a reasonable hike in your score compared to the previous review, you can:
- Negotiate a competitive credit card interest rate
- Negotiate an attractive interest rate on loans if any
- Negotiate a higher credit limit
- Ask for better insurance rates
- Bring it to the notice of your banker for loan approval if any
- Can I have more than one Credit Report?
- Yes, credit reports contain your overall banking history and are used to assess your credibility, which is your credit score. A free copy of your credit report can be obtained once a year from each of the credit rating agencies that include CIBIL, Mark High, Experian, and Equifax. You can also request for obtaining all the credit reports at once.How can I Build credit with no credit history?
- A sound credit history is useful to apply for a loan. It shows how effectively you have managed to repay the earlier obligations. If you have never used a credit card or never borrowed a mortgage, your credit history stands nil. Lenders may not issue a credit card or prolong a loan. Consider the following ways to build credit with no credit:
- Obtain a secured credit card
- Make payments in time
- Use your credit card wisely
- Restrict yourself applying for various bank loans
- Track the progress of your credit score and credit reports periodically
- Can I use my credit report to safeguard my identity?
- Yes, you can. Over 8 million adults are affected by identity theft every year. Review your credit reports once a month. Be safeguarded by obtaining an updated credit report to review for any doubtful fresh accounts. Observe the below cited general identity theft signals on your reports.
- Unanticipated usage of old credit accounts
- Wrong personal details
- Unknown credit accounts and credit cards