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Are you worried if your credit score is low when applying for a loan?

Banks and other financial institutions check your credit score for assessing your financial behaviour and credibility. So, having a high credit score improves your chances of getting better credit options. In this article, you will find details about credit score and the factors on which it depends and also measures to improve it.

What is a Credit Score?

The Credit Score is a number that lenders use to determine whether the borrower will repay on time or not. It is an important parameter in the loan and credit card approval process. It checks the borrowers' creditworthiness.

A Credit Score is a three-digit number ranging from 300 to 900 used for describing the credibility of a person and financial behaviour. While 300 is the lowest and signifies that the person is not at all suitable for providing credit, on the other hand, 900 is the highest score which suggests that the person is having great credit history and is highly credible. A score more than 700 is considered good.

Different Credit Score Bureaus keep a record of your credit and financial behaviour and calculate scores. TransUnion Credit Information Bureau (India) Limited or popularly known as CIBIL is the most popular institution whose scores are used by most of the lenders in India. Other popular credit bureaus in India are Equifax, Experian, etc.

Details captured in a Credit Score

• Personal details such as name, Date of Birth, gender, PAN, and other identity numbers

• Contact details such as registered email id and phone number

• Employment details such as salary, income, etc. from the banks.

• Credit information such as types of credits availed (credit cards, loans, overdraft, etc.) along with ownership and bank account details of payments to come to a conclusion of the overall credit score.

• Credit enquiry details of the number of times you have applied for a credit card or a loan from various banks or NBFCs.

Credit Score Parameters
The parameters on which your credit score depends are –

Payment history

This factor highly impacts your credit score. If you take any loan or use a credit card and do not make timely repayments, then your credit score gets lowered. It suggests that you are not a responsible borrower and at a high risk of defaulting.

Tip: To increase your credit score, always pay all your EMI’s on time and never revolve your credit card outstanding. This is the key factor that helps you to get a high credit score.

Credit utilization ratio

The second factor is the credit utilization ratio. This is the total amount of the credit outstanding vis-a-vis the total credit approved to you.

For example: If you have Rs. 50,000 as your credit card limit, then as per experts, you should only use Rs. 15,000 to Rs. 20,000, which is around 30% to 40%. If you use the entire credit amount i.e. Rs. 50,000 multiple times, then your Credit Utilization ratio increases and your Credit Score decreases.

Tip: Try limiting your credit utilization to about 40-50% so that you have a sufficient outstanding amount of credit that is unutilized. This would help you to strengthen your credit score.

Age of Credit

It may sound weird but if you have a long credit history which means that you have taken loans and made timely repayments or used a credit card for years and paid the bill on time, then it increases your credit score. 

Tip: The longer you have taken the credit and have repaid on time, the better would be your credit score.

Credit Mix

Though this factor has a low impact on your credit score, maintaining the balance between secured and unsecured credit can help in increasing your credit score a bit. Secured loans are against collateral such as car loans or house loans and unsecured loans are without any collateral such as personal loans, credit cards etc.

Tip: Maintain a healthy credit mix of secured and unsecured loans for a high credit score.

The number of inquiries

The number of enquiries that were done for credit or loans in different banks or non-banking financial institutions. If you apply for too many loans in a short tenure, it reflects badly on your credit score.

Tip: Avoid making multiple enquiries of loan, especially if you are denied from one, in a short duration. 

How to Improve your Credit Score?

To improve your credit score you can follow these tips -

• The first thing you need to do to improve your credit score is to pay the EMIs and credit card bills on time.

• You can keep your older Credit card accounts to have a longer credit history, as good repayment history increases creditworthiness.

• As mentioned above, you must not use more than 40% of your credit limit.

• Avoid taking multiple loans within a short period.

• You must keep monitoring your CIBIL score. There are multiple websites where you can get your monthly credit score free of cost. Checking your credit score periodically will alter you from errors if any. In case of any errors in the report, you can report it to the credit reporting company and get it corrected.

• Keep a track of joint accounts, as one is equally liable for any missed out payment by other holders in the case of joint accounts.

• Have a different type of credit mix as explained above - secured and unsecured.

The credit score is important when availing credit, and thus you must keep an eye on it and try to improve it as much as possible.