Credit score or CIBIL score? we all heard about the CIBIL. and many of us think credit score and cibil score are different things. In this post, we will discuss what is credit score. and what are CIBIL and other rating agencies?
Also read: Top 5 Payments Banks in India
What is Credit Score?
A credit score is a standard scale (range from 300 to 900) used by financial institutions to measure your creditworthiness before lending you money. In simple terms, a credit score shows your ability to pay back in the given period. It helps to ensure the bank that you are likely to pay the loan back.
In India, this procedure is carrying out by four agencies. TransUnion CIBIL, Equifax, Experian, and Highmark. This is where all the banks share the creditworthiness of all their customers. So the database of these agencies is updating every time you pay EMIs, credit card bills, etc. CIBIL is the most used in India compared to others. These agencies only track loans from the formal sectors.
Why are credit scores important?
Why is it important to strive for a higher credit score? Simply put, those with higher credit scores generally receive more favorable credit terms, which may translate into lower payments and less paid interest over the life of the account. Remember, though, that everyone’s financial and credit situation is different. Different lenders may also have different criteria when it comes to granting credit, which may include information such as your income. The types of credit scores used by lenders and creditors may vary based on their industry. For example, if you’re buying a car, an auto lender might use a credit score that places more emphasis on your payment history when it comes to auto loans.
Credit scores may vary according to the scoring model used and may vary based on which credit bureau furnishes the credit report used for the data. That’s because not all creditors report to all three nationwide credit bureaus – Equifax, Experian, and TransUnion. Some may report to only two, one or none at all. In addition, lenders may also use a blended credit score from the three major credit bureaus.
Benefits Of Having A Higher Credit Score
- A credit score ranges between 300-900. if you having a higher score, That means a score near 900. it is very easy to get approval for your loans.
- credit scores range from 300 to 599 considered very poor. leading financial companies never allow loans to you if you are having a score below 600.
- If the score is between 600 to 749, the lenders will consider other factors like banking history, salary, and previous loan tracks, etc. if all ok you will get a loan. 600-749 is a good score. but not a great score.
- and if the score is above 750, it is a great credit score. this score explains how good financial discipline you have. the lender will approve the loans without any doubt with a minimum background check.
How it is Calculated?
TransUnion CIBIL, Equifax, Experian, and Highmark all four follow a slightly different approach in the calculations of credit scores.
- Credit History counts 30% of your score. This is the monthly record of the last three years. Where your EMI, home loans, car loans will be tracking. If the payments are punctual then the credit history will give you a good score. But delays and default scans hurt the credit history.
- Credit Utilization counts 25% of the score. Credit utilization is the ratio of your outstanding credit card balances to your credit card limits. It measures the amount of available credit you are using.
- Credit Mix And Duration counts 25% of score- a customer may hold different types of credits such as education loan, mortgage, credit card, and vehicle loans. This cluster of credits is a credit mix. The good the way the customer handles these impacts positively on the score.
- The number Of Hard Inquiries counts 20% -When a credit card issuer or lender pulls your credit report from one of the three main credit bureaus this is a hard inquiry.— a hard inquiry can ding your score a few points, regardless end up approving or denied for the credit card or loan.
How To Raise Credit Score
- Pay EMI, loans on time. These may take at least 6-8 months to reflect in your credit score.
- Check for errors in your credit score report- sometimes the problems related to due and delaying are with the lender’s side, not the individuals.
- Make sure your closed loans are closed.
- Avoid accepting settlements on your loan even in the case the amount reduce significantly. The banks will report this to the credit agency which adversely affects your score in future
- Keep away from being the guarantor to friends or family who tend to habitually make late payments on their loans.
What is a Credit Bureau?
Credit Bureau is an agency that collects and analyses data related to a person or a business entity’s transactions which are made on credit. These include loans taken, credit cards used, overdraft facilities, etc., and their repayments. This analysis may also include the data regarding income taxes, timely payment of utility bills, and so on. The information is collected from lending companies, data collection agencies, money collection agencies, and various others. The purpose of collecting and analyzing such information is to create a profile of the creditworthiness of the person which includes repayment behavior, default history, and overall financial behavior.
List of Credit Bureaus
There are 4 major credit bureaus are in India. They are
1. TransUnion Credit Information Bureau (India) Limited or CIBIL
CIBIL is a comprehensive credit bureau established in 2000. it started with a license to operate in 2010. CIBIL covers the analysis for individuals as well as organizations. currently It maintains credit files of more than 600 million individuals and more than 32 million businesses.
Equifax was established in 1899 and in 2010 the company got licensed as a legal credit rating agency. The rating from Equifax lies between 1 to 999. Equifax also provides risk scores and portfolio scores in addition to credit scores for individuals. For companies, they also provide credit fraud reports, portfolio management, risk management reports, industry diagnosis, and other reports that may be obtained.
Experian is a licensed credit rating agency since 2010 in India. It was established in 2006 and it conducts an analysis of credit reports on individuals and companies. The reports take about 20 days but are not very expensive. The credit scores rating range from 300 to 900.
4. CRIF High Mark
CRIF High Mark was established in 2007 and obtained a license in 2010. The distinguishing factor of this is that the CRIF High Mark is the only one approved to operate in India by the Reserve Bank of India. CRIF conducts credit rating analysis for individuals and corporates. The score rating falls between 300-850.
A good Credit score reflects your financial discipline. in this post, we discussed credit score and its importance. so always keep a healthy score for getting financial support from any financial company. I hope this post will help you to understand the importance of a Credit score and the need to maintaining a healthy Credit score.