Credit score and its importance– a credit score is a 3 digit number mostly ranging from 300-900 using which banks or various other lenders check the creditworthiness of an individual before offering the loan to them. There are various companies that generate a credit score. In India, there are 4 credit information companies licensed to RBI- Credit Information Bureau India Limited (CIBIL), Equifax, Highmark, and Experian which does the work of giving credit scores to individuals.
CIBIL score is a 3 digit credit score of an individual that indicates his creditworthiness. An assessment can be done on the basis of credit score whether an individual will be able to pay back the loan or not on the basis of his credit history.
Process of Credit Score
The process is as follows
For example, Mr. Rahul went to the bank to take a loan. So for taking loan Rahul will submit various documents and after that bank will ask CIBIL or TransUnion CIBIL it’s parent company about the credit score of Rahul. This will indicate the credit history of Rahul and whether he will make the payment on time or net. According to the score generated and various other factors which are told later bank will decide whether to grant a loan to Rahul or not. So credit score of an individual plays a vital role in granting a loan to an individual. A score of 750+ is said to be a good score.
Now next comes how can we generate credit score
So it is very simple. Nowadays many companies generate a credit score for free. The only thing you have to do is register yourself give the details like your name, phone number, PAN card number, and submit it to them online. Your credit score will be generated instantly in 2 minutes. Various sites are available on the internet like credit keeda,www.etmoney.com (official site of Experian), www.paisabazaar.com, www.indialends.com, etc.
Features of Credit Score
- The three-digit numbers calculated by analysis.
- An important barometer of financial health.
- Based on credit report data.
- A predictive tool that measures the risk of a borrower’s delinquency or default.
- Determines who qualifies for the credit, at what interest rate, and at what credit limits.
- Generally, higher credit scores indicate lower risk.
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Factors affecting credit score
Credit score is mainly based on-
The most important factor affecting your credit score is repayment history. If one has high repayment history it is useful for the person because good the repayment history credit score will be more.
Credit Utilisation indicates how often the person is required to take loans or credit from lenders. Less the credit Utilisation more will be the credit score of the individual.
Credit mix indicates that the person has taken credit from how many various sources like loans, credit cards, home loans, and various other loans, etc. When the credit mix is high it indicates a high credit score.
High credit score means cheaper loans and faster approvals whereas lower credit score means rejection of loans or delayed approval. 750+ is a good score so if one wants to get loans easily he should try to be in the range of 750-900. NA indicates that there is no credit activity in the last couple of years and NH indicates No Credit History i.e. individual is either new to credit system or the credit history available is not enough to generate a credit score.
At last, it is advisable to keep the credit score high as much as possible. A high credit score indicates good creditworthiness of the person taking the loan. On the basis of this credit score, the lender will decide whether to accept the loan or reject it.