What is Credit Score & How to Calculate

What is Credit Score?

A Credit Score is a parameter that decides if you’re fit to be given a loan. When lenders like banks want to find out whether you’re able to repay their loans they look at your credit score to determine your “creditworthiness”. If you have a good credit score then the probability of securing a loan is higher and a lower credit score will see your loan request denied.

In India, there are four institutions that deal in credit scores. They are Credit Information Bureau India Limited (CIBIL), Highmark, Experian and Equifax. All four companies are licensed by the Reserve Bank of India.

A credit score ranges between 300 to 900 according to CIBIL, with 300 being the lowest and 900 being the highest.

How is Your Credit Score Calculated?

Factors	Weightage	What it means
Repayment History	30%	Your credit score is affected by how regularly you pay your monthly EMIs. On-time repayment boosts your credit score while defaulting negatively affects it.
Credit Usage	25%	The age of your credit accounts like loans and credit cards and the regularity of your payments affect your score. The older the accounts with no missed payments the better your credit score.
Credit Mix & Length	25%	A mix of secured and unsecured loans and how long you’ve had them your credit score. Secured loans refers to home loans and car loans and unsecured loans refers to personal loans and credit cards.
New Credit	20%	If you apply for new credit cards or loans a credit score check is done by the concerned financial institution. Every check affects your score. So more number of checks means a lower score.

What is a Good Credit Score?

According to CIBIL ratings, your credit score ranges between 300 and 900. Check out the below table to see what a good credit score looks like:

Score	What it means
Less than 300	You have no credit history because of no existing credit cards or loans.
300-550	You have a very poor credit score and you won’t be able to secure a loan.
551-620	Your credit score is still fairly poor and needs immediate attention.
621-700	This is a fairly healthy credit score but still not enough to easily secure a loan.
701-755	You have a good credit score and you can get loans at better interest rates.
Above 755	This is an excellent credit score and you can secure loans at the best interest rates.

How to Find Your Credit Score?

Official bureau’s in India can help you determine your credit score. Follow these three simple steps to generate your credit report.

Log On

Log on to an official bureau’s website like CIBIL to begin your generating your credit score report.
Enter Your Details

Generating your credit report requires information like your name, number and email ID. Enter these details to fetch your report.
Download

Once you’ve entered all your details a report is generated based on all your credit accounts and repayment history. The report will be sent to your registered email ID for download.

How can You Improve Your Credit Score?

Your credit score is based on your credit history. Better your credit history, better your credit score will be. It takes time and consistent efforts to have a good credit score. Here are some steps you can take to improve your credit score:

Manage Your Payment History

Ensure that you pay all of your credit card bills, EMIs and loans on time, every time. Even a single missed payment can lower your credit score.

Monitor Your Credit Usage

Avoid maxing out your credit card limit. Maintain your credit utilisation ratio by regularly paying your outstanding balance.

Maintain the Length of Credit History

Don’t close your old credit cards and accounts. A longer credit history shows responsible credit use and repayment.

Have a Good Credit Mix

Have a good mix of credit types (loans and credit cards) to show that you can manage different kinds of credit responsibly.

Monitor Credit Report

Regularly check your credit report for any errors. If you find any inaccuracies, get it rectified from the credit bureau.

Reduce New Credit

Open new credit accounts only when you need it. Avoid applying for new credit instruments in a short period of time.

Benefits of Having a Good Credit Score

Having a good credit scores shows your creditworthiness. This means that banks, lenders and other financial institutions view you as someone who is capable of repaying loans on time.

Higher Credit Limit

Easily increase your credit limit on an existing credit card or get better interest rates on home or car loan.
Easier Access to Credit

Greater chances of getting easy approvals for loans, credit cards and other forms of credit.
Lower Interest Rates

Higher possibility of receiving lower interest rates on credit cards and loans, thereby saving money over time.

Credit Score
FAQ

What is a credit score ?

A credit score is a numerical tool that shows your creditworthiness. It is used by banks, lenders and other financial institutions to check your credit risk and ability to repay your credits on time. A good credit score improves the probability of getting easy approvals for credits and loans.
How can I check my credit score ?

You can check your credit score for free from credit bureaus such as CIBIL, Highmark, Experian and Equifax.
What factors can affect my credit score ?

You credit score can be affected by factors such as your repayment history, credit utilisation ratio, types of credits used, length of credit history and errors in your credit report.
Is a credit score of 700 considered good ?

Yes. Banks and lenders consider a credit score of 700 and above as ‘good’ as it shows your credit worthiness. It demonstrates that you can handle your credits responsibly, both in terms of usage and repayment.
What is a bad credit score ?

A credit score that falls in the range of 300-550 is considered ‘bad’. People with a bad credit score find it hard to get loans as they are viewed as risky borrowers by financial institutions.
How is credit score calculated ?

Your credit score is calculated by the credit bureau, which takes into consideration factors such as credit repayment history, credit utilisation ratio, length of credit history, types of credits used and number of inquiries done by financial institutions.
What is credit utilisation ratio ?

The credit utilisation ratio is the percentage of available credit on your credit card that you use in a given month. It is calculated by dividing the amount of credit being used by the total credit limit on your account.
Is it important to check my credit report regularly ?

Yes, it is extremely important to check your report on a regular basis. This helps you understand your current credit position. It also enables you to detect any errors in your credit report.
How can I rectify errors in my credit report ?

If there’s any error in your credit report, you can get it corrected by the credit bureau. Raise a dispute request via call, email or online with your credit bureau. Remember you need to explain the error and submit any documents that support your claim.
Does checking my credit score frequently affect it ?

No, checking your credit score or reports regularly does not affect your credit scores. Only hard inquiries done by financial institutions can affect your credit score.
How can I improve my credit score ?

You can improve your credit score by making payments on time, maintaining your credit utilisation ratio, avoiding opening new credit accounts in a short period of time and checking your credit report for errors.
Does paying credit card bills on time improve my credit score ?

Yes, your credit score will improve if you clear your credit card bills on time.