A credit score is a number that determines your credit history and also the risk undertaken by your lender in lending you money. It can also be considered as the probability of a borrower repaying his debts in time. It is calculated taking into account several factors such as the number of accounts you hold, your payment history, the net amount owed, length of credit history, types of credit and new credit. Also, a timely cibil score check plays a crucial role. Payment history accounts for 35 percent of credit score, which helps to evaluate whether the customer pays his bills on time. The length of credit history decided 15 percent of the credit score. Also, a timely cibil score check plays a crucial role.
Longer credit periods are safer as there is a lot of information to be considered, and hence, numerous other factors come into play. The total amount owed accounts for 30 percent and determines the percentage of credit available to be used. Lastly, types of credit and new credit each contribute 10 percent each to your credit score. Types of credit include car loans, credit cards mortgage loans, etc. New credit involves the number of new accounts a customer has and the number of new accounts being used for applying. CIBIL Score and the VANTAGE score are some well-known measures used by lenders in accessing your credit score.
Why do we need a credit score?
Your credit score plays a deciding role in the interest rates levied on your loans and even on the likeliness of your loan getting approved. Higher the score, the lesser is the risk involved in lending money to a customer, and the greater are his chances at negotiating a lower interest rate. A good credit score increases a customer’s creditworthiness to his lenders. A good credit score also decides the size of down payment required for acquiring the loan.
Customers having a credit score of 800-850 are perceived as extremely financially trustworthy and are the most likely to receive the lowest interest rates on mortgages, credit lines, and loans. They can even bargain for a longer repayment period or are usually granted so first hand. The credit card balance to the credit limit ratio is also crucial in determining your credit score. More the difference between the two, higher is the credit score.
A score of 680 to 799 is considered as a fair credit score. Such borrowers may have some dents in their credit history but are not major defaulters. They are still likely to be extended loans by most creditors but might not get the most competitive rates. This is because to compensate for the risks involved in lending money to frequent defaulters. Lenders often charge higher interests than the conventional rates along with shorter payment periods.
A credit score below 500 is a poor credit score. This occurs due to some significant bumps in a borrower’s credit record. Such borrowers are unlikely to get loans and even if they manage to get one, the rates are usually quite high. Another class of borrowers does not have a credit score due to no credits or loans availed in the past. Such borrowers entail a very low credit score while applying for a loan. These are customers having a score of 300 or lower.
Consulting financial professionals to assist in improving their credit records is the best way to proceed in this case. Paying your credit card bills, EMI bills, electricity bills, and other pending bills on time and in full can gradually improve your score. The bottom line being, a consistently good credit score is not easy to maintain. However, a little extra effort and vigilance go a long way to improve your score and makes the process of acquiring a loan smooth and less stressful.