Your credit score is a synopsis of your credit history represented by a 3 digit number. It is an indication of how likely are you as a borrower to repay the debt undertaken. This number ranges between 300 and 900. At a glance of your score, a lender can draw conclusions about your performance in the past as a borrower and based on these conclusions will predict how risky is extending a loan to you.
Lenders are in a business of lending and are not there for any charity. Like any business, they undertake the risk of non-receipt of payments when they given loans. If a person has a score of less than 700 and nearing 300, that person is considered to be moderately risky to very risky. Whereas, a person whose score is more than 700, that person is considered to be less risky. A less risky person is more likely to repay the debt whereas a more risky person may not.
A score of “-1” indicates that you are less than six months old in the credit space and do not have enough credit history to be rated upon. A score of “NA” or “NH” would mean that you probably have not had any credit relationship for atleast past 24 months. Your credit score is calculated on the basis of at least 6 month’s data not exceeding 24 month’s data. So any information more than 2 years old is beyond the scope of a score calculation.
So it only makes perfect sense that you understand what factors fuel the calculation of your score and how can you manage them. The Credit Information Bureau (India) Limited determines your score on the basis of the following factors:
- Timely Repayments in the past: This is the most important factor and has a weightage of almost 35% in the calculation of your score. By saying this we imply that you must make sure that all your payments are made within the stipulated time limit. For every credit taken, you have to repay it in monthly instalments. For example, be it a personal loan, home loan or you have charged your credit card, every month there is a date given to you for making the payment. You are expected to make the payment by this due date. If you do not make the payment on or before that date, then your payment is marked late. All late payments are reported as “past due” to CIBIL & being late regularly brings down your score.
However, if you have been industriously making all payments on time, then it will help build your score and contribute majorly in impressing your lenders.
- Current exposure to credit: This is the next most important factor and has a weightage of almost 30%. This signifies how much of credit have you already taken. It also helps banks and other lending institutions to calculate your eligibility of loan. The thumb rule is that your credit exposure in monthly EMIs cannot exceed 50% of monthly income.
For example, your monthly income is Rs. 1 lakh. Then the limit of your instalment based credit cannot exceed Rs. 50, 000. So, let’s say currently you are paying EMIs worth 30, 000 and have applied for a loan where you will have to bear an additional EMI of Rs. 40, 000. But the bank will allow only an amount of loan where additional EMI burden will not be more than 20, 000. So, total EMI after new loan will be 30,000 + 20,000=50,000
- The older the better – This factor contributes 15% to the calculation of your CIBIL score. Your score is calculated on the basis of your credit activities in the past 24 months. So, if you have a credit card which you have had for more than 2 years then it will have a more favourable impact on your score than the one which you have recently acquired.
- The different types of credit mix – This factor too has a weightage of 15%. Banks want to see your ability of handling different types of credit. What is generally recommended by experts is that 75%-80% of your loan portfolio should be skewed towards secured loans, such as home loan or car loan. The fraction of unsecured loans like education loan or unsecured personal loan should not be more than 20%-25%.
Also, there should be a healthy mix of revolving credit like using a credit card and that of instalment based credit like EMI based loans. Handling all of these responsibly helps construct your score.
- Hunt for new credit – This factor although has a weightage of only 5% in the calculation but it has a serious impact on your image as a borrower. A lender enquires about your CIBIL report every time you ask for a credit. Applying for too many loans makes prospective lenders wonder why you need so much credit, will you be able to handle the building debt and interest burden and perhaps, you are already in a debt soup and are seeking more credit to pay that off. Thus, it is not advisable to keep on looking for more & more loans.
Pearls of Wisdom
You can check your CIBIL rating online to keep a tab on it. Your score is not a permanent figure. You can make it or break it depending upon your actions with regards to your finances and credit. If you are reckless with your credit, it will reflect as a poor score. If you have been careful with your credit, it will reflect as a good score. Make prudent choices and stay credit healthy always.