A credit score is one of the most important numbers in your financial life. It affects your ability to get loans, credit cards, and even influences the interest rates you're offered. Whether you're planning to buy a house, apply for a car loan, or just want to maintain financial discipline, understanding your credit score is essential.
In this article, we explain what a credit score is, how it works, how to check it, and most importantly - how to improve it.
What is Credit Score?
A credit score is a three-digit number that represents your creditworthiness or how likely you are to repay your debts. It is calculated based on your credit history, including loans taken, repayment patterns, credit card usage, and defaults (if any).
In India, credit scores range from 300 to 900. A higher score indicates better creditworthiness. The most commonly used credit score in India is the CIBIL score, but there are other bureaus like Equifax, Experian, and CRIF High Mark as well.
Why is it important to maintain a good credit score?
Lower Interest Rates: With a good credit score, you are more likely to qualify for loans and credit cards with lower interest rates.
Insurance Premiums: In some cases, insurance companies use credit scores to determine insurance premiums.
Financial Stability: A good credit score is often indicative of financial responsibility and good money management habits.
Ability to Rent Housing: A good credit score can increase your chances of being approved for rental housing, especially in competitive rental markets.
Utilities and Services: Utility companies, such as electricity, gas, and water providers, may check credit scores when setting up new accounts or determining deposit amounts.
Credit Score Range
A good credit score normally falls within the higher ranges of the credit scoring system, indicating a lower credit risk to lenders. Read the credit score list.
| CIBIL SCORE |
What does the score mean? |
| 300 - 549 |
Poor - Individuals who fall within this range may find it challenging to obtain credit or loans from traditional lenders. They may have a history of missed payments, defaults or high credit utilization. |
| 550 - 649 |
Fair - People falling in this range may have a mixed credit history. They may have made a few late payments or had a high credit utilization, but their credit behavior is also somewhat positive. |
| 650 - 749 |
Good - Individuals falling in this range have a relatively healthy credit profile. They have a track record of making payments on time, managing credit responsibly and maintaining a good credit utilization ratio. |
| 750 - 900 |
Excellent - Individuals falling in this range have an exceptional credit profile. They have a long history of responsible credit management, including consistently making on-time payments, keeping credit card balances low, and having a diverse mix of credit accounts. |
How to improve credit score?
Improving your credit score is important for various financial endeavors, such as obtaining loans, credit cards or mortgages, as it improves your standing towards lenders.
Pay Bills on Time: Payment history is an important factor in calculating your credit score. Make sure you pay all your bills on time, including credit card bills, loan EMIs and utility bills. Late payments can badly effect on your credit score.
Don't Close Old Accounts: Closing old credit card accounts can reduce your credit history and reduce the total length of your credit accounts, which can negatively impact your score. Instead, keep old accounts open and use them occasionally to maintain a positive credit history.
Reduce Credit Card Balances: Keep your credit card balance low relative to your credit limit. When you use a lot of your available credit, it can hurt your credit score.
Restrict New Credit Applications: Every time you apply for new credit, such as a credit card or loan, a hard inquiry is placed on your credit report, which can temporarily lower your score. Minimize the number of new credit applications you make in the short term.
