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How your Credit Score is used

A credit score is an important factor that brings you one step closer to your dream of buying a house or a car. It is a key measure of your creditworthiness which is represented in a numerical format. A credit score ranges from 300-900. You should always take steps to bring your credit score closer to 900. People with a credit score of 750 and above can get quicker loan approvals as well as better interest deals.

Credit score is used for the following purposes:

What are Credit Scores Used For?

When you apply for a loan or a credit card, lenders like banks and non-banking finance companies (NBFCs) check your credit score to see whether you have the ability to repay the borrowed sum. A credit score gives lenders an idea of your financial health. Let’s take a look at some of the areas when your credit score is taken into consideration.

  • Lenders and Credit Card Issuers:
  • First and foremost, banks and NBFCs need to know your credit health and all about your past and present payments. Your credit score determines your creditworthiness. Lenders need to make sure that you can repay the loan amount on time and your credit score will help them take a decision about your loan. When you apply for a home or auto loan, lenders will pull out your information from credit bureaus and also take a detailed look at your credit report. Credit reports comprise your repayment behaviour and credit history. If you have a high credit score (750 and above), you will be eligible to receive preferential pricing for loan interest rate from lenders.

  • Landlords:
  • Landlords might check your credit report before renting you a house as they want to make sure you have the ability to pay the rent on time. This practice is quite common in the international markets since the past several years. It is still in the nascent stage in India; however, it might become a regular practice in a couple of years. Therefore, it is better to work towards gradually increasing your credit score.

  • Employers:
  • There are some employers who check your credit score before hiring you. However, it must be noted that you will need to give the employers permission to pull out your credit report. Again, this practice is still not widespread in the country.

  • Benefits of Having a High Credit Score:
  • A high credit score brings you one step closer to your dream of buying a house or owning a car. With a high credit score, you can get access to credit card with better rewards and benefits. Let’s take a look at some of the top benefits of a having a good credit score:

  • Quicker Loan Approvals:
  • A high credit score suggests that you have been disciplined and consistent in your credit card payments and EMIs. Therefore, it takes relatively lesser time for lenders to do a background check and scrutiny your documents. The loan application process will be quicker as compared to people with a low credit score.

  • Higher Credit Limits:
  • With a higher credit score, you can get credit cards with a higher credit limit. In addition, you can get credit cards with higher rewards and benefits. Lenders will get the assurance that since you have displayed a good credit behaviour, they can increase the credit limit on your credit card. Increasing the credit card limit can also help you improve your credit score.

  • Discount on Interest Rate:
  • As mentioned earlier, people with higher credit score are in a position to negotiate and ask the lenders to give a discount on the interest rate for a loan. At present, the majority of lenders are willing to offer loans at cheaper interest rates for people with a credit score which is more than 750.

  • Waiver from Fees and Charges:
  • Along with lower interest rates, you can even ask the lender to waive off the fees and other charges that are involved while processing your loan application.

  • Eligible for Credit Cards and Loans:
  • The main advantage of having a high credit score is that you automatically become eligible to avail a loan or a credit card. Individuals with credit scores lower than 750 usually find it difficult to get a loan approval as the lender is not sure enough if they have the ability to repay the borrowed amount in a given time.

Tips to Improve your CIBIL Score

There are four main factors that make up your CIBIL score:

Payment History 30%
Credit Exposure 25%
Credit Type and Duration 25%
Other factors 20%

Each of the above-mentioned factors has their own weight and therefore if any of them gets affected it brings down your CIBIL score. Here are some simple tips that will help you improve your CIBIL score:

  • Pay bills on time
  • Avoid paying minimum balance due
  • Increase credit card limit
  • Don’t close old credit cards
  • Monitor your credit report
  • Check your credit score periodically
  • Maintain up to 30% of credit exposure
  • Good balance of credit mix
  • Understand your credit report

In the end, you need to understand that a healthy CIBIL score suggests you are a responsible borrower and you can be trusted with a credit amount. If you are consistent in paying your bills on time and clearing off any due balance, you will automatically improve your CIBIL score.

Read More on CIBIL

TransUnion CIBIL is one of the leading credit information companies in India. The company maintains one of the largest collections of consumer credit information in the world. CIBIL Score plays a key role in the lives of consumers. Banks and other lenders check the CIBIL Score of the applicants before approving their loan or credit card application. Consumers can visit the official website of CIBIL to check their CIBIL Score and Report.

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