In today’s consumer-driven market, the desire to own the latest products often surpasses income levels, making consumer credit an essential tool for fulfilling aspirations. However, securing credit from banks hinges on having a good credit score—a vital indicator of financial health.
In India, four credit bureaus approved by the Reserve Bank of India (RBI)—CIBIL, Experian, CRIF High Mark, and Equifax—assign credit scores to individuals based on their financial behavior and credit history.
What is a Credit Score?
A credit score is a three-digit number, typically ranging from 300 to 900 in India, that reflects an individual’s creditworthiness. It is calculated based on factors such as credit history, repayment behavior, and financial habits.
Score Ranges:
- 750 and Above: Excellent – Higher chances of loan approval with favorable terms.
- 650–749: Good – May qualify for credit, but not always at the best interest rates.
- 550–649: Average – Higher likelihood of rejection or unfavorable loan terms.
- Below 550: Poor – Indicates significant risk to lenders.
Factors Affecting Credit Scores
- Credit Composition
Maintaining a diverse mix of credit accounts, such as car loans, credit cards, and housing loans, can positively impact your credit score. It demonstrates your ability to manage different types of credit products effectively. - Payment History
A consistent record of on-time payments is the most critical factor influencing your credit score. Late or missed payments can significantly harm your creditworthiness. - Credit Utilization
This reflects how much of your available credit limit you are using.- High utilization such as using 90% of your credit limit—signals a stretched financial position and negatively impacts your score.
- Aim to keep your utilization ratio below 30% to maintain a healthy credit profile.
- New Credit Accounts
Opening multiple new credit accounts or having frequent credit inquiries in a short period may signal financial risk and lower your score. Be cautious and strategic when applying for new credit.
Key Insights for Improving or Maintaining a Good Credit Score
i. Monitor Your Credit Report Regularly
- Errors in your credit report, such as incorrect defaults or unauthorized accounts, can negatively impact your score.
- Regularly review your report from credit bureaus like CIBIL, Experian, Equifax, or CRIF High Mark.
ii. Pay Your Bills on Time
- Late payments on loans, credit cards, or utility bills significantly affect your score.
- Setting up automated payments can ensure consistent on-time payments.
iii. Manage Credit Utilization
- Keep your credit utilization ratio below 30% of your total credit limit.
- Regularly pay off credit card balances to reduce utilization and boost your score.
iv. Avoid Excessive Credit Inquiries
- Each loan or credit card application results in a “hard inquiry,” which can temporarily lower your score.
- Space out credit applications and avoid applying for multiple accounts at once.
v. Maintain a Long Credit History
- The length of your credit history impacts your score. Keeping older accounts active can be beneficial.
- Avoid closing old credit cards unless absolutely necessary.
Factors That Don’t Affect Credit Scores
- Savings Accounts or Fixed Deposits: These are not part of your credit profile.
- Income Level: A credit score reflects financial behavior, not income.
- Soft Inquiries: Checking your own credit score does not negatively impact it.
Insights for Young Professionals and Students
- Start early by applying for a small credit card or loan to build a credit history.
- Use secured credit cards (backed by fixed deposits) to establish credit if you’re just starting out.
- Always pay your dues in full to avoid the temptation of carrying balances forward.
Final Thoughts
Your credit score is a reflection of your financial habits. By understanding the factors that influence your score and following these strategies, you can build a strong credit profile. A good credit score ensures access to financial opportunities and lays the foundation for a secure financial future
Learn-Do Finance 