Let us decode today all basic details about credit score. First, we start with the main question, Why is the score required? And then. How the score is derived? What are the criteria that affect the score? What is the range of credit score? Which score is considered a good score and which is a bad score? What does the score affect? Eventually, let us take each question and become our own guru when it comes to credit score. First of all, understand that credit score is no rocket science. It is a basic concept if understood properly, you may never go wrong and get a drop in your score!
Let’s start with the first question:
Why is the score required?
Credit Score shows the worthiness of an individual. When one applies for a credit either in the form of a loan or the credit card, the banks or the NBFCs (Non Banking Financial Institutions) checks the score and then decides first to approve or reject the application and then if loan then at what rate should it be approved and if credit card then the credit limit.
What is the range of credit score?
A credit score is a three-digit number ranging from 300 to 900. 300 is the least of score and 900 is maximum.
Which score is considered a good score and which is a bad score?
A score that falls between 300-600 is considered a bad score. A score that ranges between 600-750 is considered as an average score and the score above 750 upto 900 is a good score.
How is the score derived?
There are four different credit bureaus in India who gives the credit score to each individual. They are CIBIL (Credit Information Bureau India Limited), Experian, Equifax and CRIF Highmark. These bureaus have five different criteria for evaluating an individual’s score. These five factors are Payment History, Amount Owed, Credit Mix, Length of Credit History and New Accounts. Majorly the algorithm that evaluates the score has the weightage across all these parameters which is decided by the bureaus!
What are the criteria that affect the credit score?
1. Payment History
Payment History constitutes the major weightage in a score. 35% of the total score comprises of payment History. This is not just the details of the payments that are done but also the detailed description of how the account of any loan say personal loan, education loan, business loan, home loan or car loan and the credit card repayments are done. The delays, dates that are missed or any credit account that is not closed is all mentioned here and affects the score.
2. Amount Owed
Surprisingly, the total amount owed by an individual carries 30% of the weightage in a score. This usually is the current outstanding of the loans and credit cards limits that says the total amount owed by anyone.
3. Credit Mix
This one has 15% of importance. The credit that is taken is divided into 4 categories. Fixed type of credit, Revolving type of credit and Secured type of credit and unsecured type of credit. As the name suggests, these are the basic ones that give you the idea about what exactly they are. A good mix of all these types of credit also makes a good part of the score.
4. Length Of Credit History
How long has been the first ever credit account opened and if it’s still on consists of 10% of the credit score. One must try and not close the oldest credit account in such case for keeping the score better.
5. New Credit Account
Each new credit account opened consists of the last 10% of the score. This doesn’t mean that anyone keeps on opening the account and the score will increase. That would seem the Credit hungry behavior and may drop the scores down. Maximum a new credit account should be opened once in 6 months!
If all these points are taken care for, you can be your own credit score guru and need not be worried about how it works and take advises from various people!