A credit score can be defined as a 3-digit number between 300 and 900 that describes the credit merit of a credit card holder or of an individual who has taken a loan. In order to grant a loan in India, the potential lenders use the credit scores calculated by CIBIL TransUnion, Experian, Equifax or CRIF High Mark. Several lenders consider CIBIL scores to be the benchmark for granting a loan to a borrower. Credit scores help to depict the credit and repayment history, utilization of credit, tenures of previous debts, and so on. Although the banks in India have their individual limit to grant loans, your chances of getting a loan approved is higher if your credit score is 900.
How is Credit Score calculated?
The score is calculated by every credit information company, using its proprietary algorithm. This depends on several factors such as the credit history of the candidate and his/her credit repayment conduct. A number of aspects are taken into consideration while calculating the credit scores, which are:-
According to a few experts, the credit history plays a vital role in determining an individual’s credit score. This aspect holds information about your previous credit card and loan payment history, timely repayments and outstanding amount, if any. If you have failed to repay your loan amount or any credit card payment on time, then this will reflect on your credit history, which in turn, will negatively affect your credit score.
The second most important factor that impacts your credit score is the credit type. Credit bureaus such as CIBIL TransUnion, Experian, Equifax or CRIF High Mark take into consideration the secured or unsecured type of loans that was approved in the past and how old your credit history is. Individuals with high credit scores have both secured and unsecured loans and do not depend on a single type of debt like credit cards or a personal loan. For example, mixing an unsecured debt like a credit card with a secured debt like a property loan is better than relying on only a credit score to maintain a high score.
Credit exposure depends on how high or low your credit score is. In case of a credit card debt, the credit score tilts to the higher side while having zero debts may go against you. Moreover, individuals with a lower debt and an appropriate credit ratio, i.e. less than 40%, tends to have a higher credit score. This reflects the individual’s capability to take an added debt and repay it on time.
There are several other factors which play a significant role in determining your credit score. Applicants who have handled credit like loans and credit cards for a long period tend to have higher credit scores. On the other hand, applicants who have been rejected numerous times for new credit have a lower credit score as this reflects on your credit report.
How Banks Determine whether to Give you Credit
Each time you apply for a loan or any other form of credit like a credit card for instance, the creditor has to determine if you’re capable of paying back the loan and if it’s a risky business to lend you money in the first place. Therefore, they primarily use your Credit Score to evaluate your credit worthiness, how worthy you are of receiving credit.
A credit score is a structure put in place to understand how risky it is to lend to a potential customer. All transactions made by you in the credit market is recorded and is equated to points. These points are then evaluated to a number between 300 and 900. This is your credit score and the higher it is, the better your chance of obtaining a loan. If you are below a certain threshold in terms of your credit score, a creditor may decide not to grant you a loan.
There are many factors that affect your credit score and different creditors have different thresholds when granting a loan. Some of the factors that banks consider before approving a loan are:
Amount and duration of the loan – All your secured and unsecured loans are recorded in your Credit Report. A high amount of debt, especially unsecured debts, is perceived to be a risky investment for creditors. And, a longer duration of the loan is treated as less risky by creditors.
Past behaviour – Your previous debts and the discipline in repaying the debt is a major factor that banks take into consideration before approving your loan. Of course, the bank is more likely to approve your loan if you’ve been repaying your previous debts on a timely basis.
Credit utilization ratio – Credit utilization ratio is the ratio of the overall credit available to a borrower against the outstanding balance throughout all loan accounts. The closer you are to using up your maximum credit limit, the lesser the chance of you getting the loan approved. A higher credit utilization ratio illustrates to a creditor that you are craving for credit. This may lead to a rejection in a loan or credit card.
Other factors – Other factors such as defaults in previous payments, failed loan applications, rejected credit card applications, repayment behaviour, etc., are all factors that banks take into consideration before approving a loan or credit card.
Overall, it is important to be disciplined at repaying your debts. This will generate a good credit history and will also be a huge catalyst in helping you get your future loans and credit cards approved.