What Is A Good Credit Score And Why Is It Important?

The personal finance landscape is so dynamic that there’s no shortage of access to credit and financial opportunities. But to take advantage of these, it’s crucial to maintain a good credit score. Lenders will check the borrower’s credit scores to evaluate their creditworthiness before granting them loans or extending credit. If you seek financial stability and success in the credit ecosystem, it will help to understand a good credit score and its implications on your finances.

What Is A Credit Score?

A credit score numerically represents an individual’s creditworthiness and reflects their credit history, repayment behavior, and financial habits. A higher score indicates better creditworthiness, providing access to credit cards, loans, and other such financial products with favorable terms.

How Are Credit Scores Calculated?

In India, credit score are computed by prominent credit bureaus like CIBIL (Credit Information Bureau India Limited), Equifax, Experian, and CRIF High Mark. The credit score range falls between 300 to 900, and CIBIL provides the model primarily used in India. All four bodies use different scoring algorithms and models. Thus, a person’s score will vary from bureau to bureau. However, each bureau considers common factors while calculating credit scores. And these are:

1. Repayment History:

This is the most crucial factor, accounting for a significant portion of the credit score. Timely repayment of loans and credit card bills positively influences the credit score, while late payments or defaults have adverse effects.

2. Credit Utilization:

This is basically how much of the credit available is being actually utilized by the borrower. This factor holds substantial weight in the credit score calculation. Lower credit utilization is seen as favorable for a higher credit score.

3. Credit Mix:

The diversity of credit accounts, such as secured loans, unsecured loans, and credit cards, can positively influence the credit score.

4. Length Of Credit History:

The amount of time an individual has held credit accounts plays a role. A longer credit history allows for a more comprehensive and accurate assessment of credit behavior.

5. Credit Inquiries:

The number of recent credit inquiries or loan applications made by an individual can affect the credit score. Multiple inquiries within a short period are a red flag and may raise concerns for lenders.

Defining A Good Credit Score In India

In the Indian credit landscape, credit scores are typically categorized as follows:

1. Excellent:

A credit score above 800 is considered ‘Excellent’. Individuals with such scores will likely be eligible for the best interest rates and favourable loan terms.

2. Good:

A credit score between 750 and 799 is considered ‘Good’. Borrowers in this range are generally seen as creditworthy and have a good chance of obtaining credit at competitive rates.

3. Fair:

A credit score between 650 and 749 is considered ‘Fair’. While individuals in this range may generally be eligible for credit, they might not qualify for the most favorable terms.

4. Poor:

A credit score below 650 is considered ‘Poor’. Borrowers with scores in this range may find securing credit from traditional lenders challenging and may need to explore alternative options.

The Impact Of A Good Credit Score In India

Having a good credit score in India can have several positive impacts:

1. Loan Approvals:

Lenders heavily rely on credit scores when evaluating loan applications. A good credit score enhances the chances of loan approvals.

2. Lower Interest Rates:

Borrowers with good credit scores are likelier to qualify for loans with lower interest rates, resulting in reduced borrowing costs.

3. Higher Credit Limit:

Lenders may offer higher credit limits to individuals with good credit scores, providing greater financial flexibility.

4. Faster Loan Processing:

A good credit score can expedite the loan approval process, enabling quicker access to credit.

5. Negotiating Power:

Individuals with good credit scores have the better negotiating power to secure favorable terms with lenders.

How To Improve And Maintain A Good Credit Score

For those aiming to improve their credit scores or maintain a good score, the following tips can be beneficial:

1. Timely Repayments:

Ensure timely repayment of all credit obligations, including loans and credit card bills.

2. Monitor Credit Utilization:

Aim to keep credit card balances well below the credit limit to maintain a low credit utilization ratio.

3. Avoid Multiple Loan Applications:

Limit the number of credit inquiries by avoiding frequent loan applications. Apply for credit only when it is required.

4. Check Credit Reports Regularly:

Obtain and review credit reports from different credit bureaus to identify discrepancies and promptly rectify errors.

5. Maintain A Mix Of Credit:

A healthy mix of secured and unsecured credit can positively impact the credit score.

So, a good credit score is the key to financial opportunities and stability in the credit landscape. By understanding the factors contributing to a credit score and practicing responsible credit behavior, one can achieve a good credit score, paving the way for a brighter financial future. IIFL can help you achieve this by analyzing your credit behavior and offering expert advice to improve the same. You can also benefit from numerous offers on loans and other credits based on your score.