Credit Score. A tricky thing but not rocket science that one can’t understand. let’s understand the basics! A credit score is a three-digit number, ranging between 300-900. A score that is 750 or above is a good score, a score between 600-750 is average and anything below 600 is a bad or a low score.
Why is credit score important?
Almost when we are in the completion of the second decade of the 2000s, majorly the money rollings happen on loans or credits. One applied for a loan, or the credit they want and negotiate on the terms and get the money they want with the interest. Now, when this process works in association with a bank, or an NBFC (Non-Banking Financial Institution), they keep the record of the money landed, and when and how it was repaid! These are the info that goes to credit bureaus and with the algorithms, a credit score is generated. This score gives the idea about the creditworthiness of an individual and how responsible he/she is in handling the credit. And depending on that score, when applied for new credit, it is either approved or rejected. And that is why a credit score is important.
Which are the credit bureaus?
Ever wondered who gives the score or who calculated the score? The answer is the credit bureaus. There are four credit bureaus in India. CIBIL (Credit Information Bureau India Limited) established in 2000 and serving as the pioneer, Equifax, Experian, and CRIF Highmark which came eventually in existence. Since CIBIL was the first bureau, many people address credit score as CIBIL Score. These bureaus have an algorithm based on various parameters that check and gives the credit score.
What are the Parameters of credit score?
1. Payment History: How responsible one has been in handling credits (credit card bills and loan EMIs) and replaying them on time.
2. Amount Owed: How much credit has been taken to date.
3. Length Of Credit History: How Long had one been taking and managing the credit.
4. Credit Mix: A good mix of secured and unsecured credit along with a fixed and revolving type of credit.
5. New Credit: At a regular interval if new credit is applied.
These five parameters are given various percentage weightage by the credit bureaus and by that the score is established. As mentioned earlier, a score is one thing that can make or break the dreams looked for when it comes to applying for a loan and getting is approved! Better or higher the score more are the chances of getting the credit line approved! But, what to do if the score is low?
How to improve CIBIL score?
Let’s say, we have the fastest target of two months, say Holi. Now, considering the five parameters mentioned above, start working on each of them. Payment history, check your score and credit report. See if there are any missed payments, late payments or unclosed accounts. First and foremost work on that. Take a small loan if you have a cash crunch to clear the old debts. This will help in the second parameter. Length of old credits is to be taken care for. The oldest credit card, even if not in use, don’t discontinue. Pay the annual fees and keep it on. Take a loan which is a secured one, say gold or a car loan. Also, mix it with a personal loan. A credit card is also an option and hence a good mix of secured, unsecured and revolving loan with add up to the value. Since you are applying for new credit, this anyway will add to all of this!
Make sure that the credit card utilization ration does not exceeds 40% of your total limit. Do not apply for too many credits. As that may come across credit hungry behavior and will drag the score down!
Just these few moves and you will see the change in your score that will boost up your requirements! What are you waiting for? Start working on them from today!