A credit rating is also known as credit score and comprises of three digits. The three digit number ranges between 300 and 900. Potential lenders like banks and NBFCs get an idea about the credit health of a particular customer. The credit rating is the reflection of your ability to meet your financial commitments within the banking system. Several factors are taken into consideration while calculating the credit score or rating. The most important factor for determining your credit rating is the repayment history. The repayment history for the pat 7 to 10 years can be availed in the reports where you find the credit ratings.
How is the Credit Rating Calculated?
Credit rating agencies issue the credit score or ratings based on your repayment behaviour. There are three different organisations that offer credit reports to the people. These credit rating agencies are CIBIL, Experian and Equifax. Your credit track record is judged before giving out your credit score. None of your investments or assets are taken into consideration when you credit score is calculated. Even your financial transactions that are not associated to any kind of credit are not taken into account.
The three credit agencies – Equifax, Experian and CIBIL – have all the information about every credit transaction that you make. This can include formal banking system, monthly EMIs, loan or credit card application made by you and information on whether it has be accepted or turned down. The credit score agencies also get information from the lenders on missed or late payments. Information about complete and partial payments are also sent by the banks and the Non-Banking Financial Companies. All of these factors play an important role when your credit score is being calculated.
Why is Credit Rating Important?
There are quite a few situations when your credit rating plays an important role:
- Applying for a Loan – Potential lenders like banks and Non-Banking Financial Companies ask the credit rating companies for the applicant's credit score. When they get the credit report, containing the credit rating and credit history, they can deduce if the applicant is a high risk customer. In case you have low credit rating, the banks and the Non-Banking Financial Companies could be unwilling to provide you a loan as they are not assured of the fact that you will make timely payments for clearing the debt. If you have a score that looks good, lenders will consider you to be safe and low-risk customer. They will also not hesitate to approve your loan request. You can avail lower rates of interest when you gave good credit rating.
- Applying for a Credit Card – If you have a credit rating that is good, you will be able to avail lower rates of interest and higher limits of credit. Along with these, you can also enjoy waiver of credit card fees in some cases. If you do not have a good credit score, you will not be able to enjoy attractive rates of interest. Chances are that your credit card application will be declined by the lender.
- Applying for a Job – You can be asked for your credit rating by your potential employer. Employers often judge their employees by analysing the pattern of their financial responsibility. If you are looking for a job in the finance sector, you must have a good credit score.
- Planning to Rent – Sometimes, your landlord can ask the credit agencies to provide a report about your behaviour towards loans and credits. This is to understand if you are capable of paying the rent on a regular basis. You might not get the flat on rent if you do not have a good credit score.
What is a Good Credit Score?
If your credit score is above 750 then you can easily get a loan from a bank or NBFC. Several loans are approved automatically when you have score that high. If the score drops below 750, then you might face rejection from a lender. Even if the loan is approved by the lender, you will not be able to avail competitive rates of interest. Thus, it is highly advisable that before you apply for a loan, you have a good score.
How to Get a Credit Rating?
In order to get your credit score from any of the three credit agencies (Equifax, Experian and CIBIL), you will have to apply online and provide address and identity proof. After the verification process is complete, you will get the credit report which has your credit rating or score in it.