A credit score predicts your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports. The higher your credit score, the better your chances of securing loans with favourable terms.
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What Is a Credit Score?
A credit score is a number that represents your credit behavior or creditworthiness. It is an indicator of how consistent you are with repaying your debts. When you borrow money from lenders like banks, your repayment information is sent to credit information companies that compute a credit score. The higher your credit score, the better your chances of securing loans with favorable terms.
How Credit Scores Work
Credit score has a huge impact on your financial decision. A good score can help you benefit from market rates while a low score reduces your chances of getting a loan approved.
You can also get better interest rates when you have a higher credit score, which can save you money in the long term.
A credit score of 700 or above is typically seen as favorable by lenders and can lead to lower interest rates. Scores over 800 are regarded as exceptional. Each lender sets its own credit score ranges and lending criteria. Here’s a general breakdown of credit score categories.
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
What Factors Impact My Credit Score?
It is important to know the factors that affect your score; knowing them will not only help you in getting your scores high, but it will also help you in making good financial decisions. Here are the factors that affect the score most.
- Payment History (35%): Whether you pay your bills on time significantly impacts your credit score. Late payments, including how many and how late they were, are taken into account.
- Amounts Owed (30%): This reflects the percentage of your available credit that you are currently using, also known as your credit utilization ratio. Lower utilization generally indicates better financial management.
- Length of Credit History (15%): A longer credit history is viewed more favorably as it provides a clearer picture of your financial habits over time.
- Credit Mix (10%): Having a mix of credit types—such as installment loans (e.g., car or mortgage loans) and revolving credit (e.g., credit cards)—demonstrates your ability to handle diverse credit responsibilities.
- New Credit (10%): Applying for multiple new credit accounts in a short time can be seen as a red flag, indicating potential financial instability or credit desperation.
Know This
Your credit score also may determine the size of deposit required to get a smartphone, cable service, or utilities, or to rent an apartment.
Credit Scores in India
In India, there are four credit information companies licensed by the Reserve Bank of India. These are Credit Information Bureau (India) Limited (CIBIL), Experian, Equifax and Highmark.
The CIBIL credit score is a three-digit number, which ranges from 300 to 900, with 900 being the best score.
How to Improve Your Credit Score
The steps you take to improve your credit score will depend on your unique credit profile. In general, it’s important to understand the factors that influence your score, including your payment history, amounts owed, length of credit history, credit mix and new credit.
Whether you’re building credit from scratch or rebuilding after some credit missteps, understanding the factors that go into your credit score can help you determine which steps to take. With that in mind, here are five important ways to improve your credit score, how much impact they’ll have and how long it can take to start seeing results.
- Make On-Time Payments: Your payment history makes up 35% of your credit score, making it the most significant factor. This history includes on-time, late, and missed payments, which are reported to the major credit bureaus (Experian, TransUnion, and Equifax). Consistently paying on time is one of the most effective ways to boost your credit score.
- Pay Down Revolving Account Balances: Your credit usage makes up 30% of your score, with credit utilization being a key factor. While experts suggest keeping it under 30%, it’s best to keep it as low as possible.
- Don’t Close Your Oldest Account: Length of credit history accounts for 15% of your credit score, influenced by the age of your oldest account and the average age of all accounts. While loan accounts close once paid off, credit cards can remain open indefinitely. Closing an old credit card may negatively impact your score.
- Limit New Credit Applications: Hard inquiries, which occur when you apply for credit, account for 10% of your FICO® Score. Each inquiry may reduce your score by fewer than five points, but multiple inquiries in a short time can have a bigger negative impact.
- Keep Information Same: Keeping personal information like address or DOB different can negatively affect your score, so keeping your data consistent will help you improve your score.
What is a Good Credit Score to Have?
What constitutes a good credit score is ultimately determined by the lenders. Ranges vary depending on the credit scoring model. Generally, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and higher are considered excellent.
Closing Thoughts
Your credit score plays a crucial role in your financial life. A good score increases your chances of qualifying for loans with better terms, potentially saving you money. Understanding your credit score and the factors that affect it can help you improve it.