A credit score is a 3 digit summary of credit worthiness. It shows if you are worthy of loans and credit cards. Banks want to know if you are likely to repay loans and credit score gives them the data. It is a three-digit number from 300-900 where 300 is the lowest score and 900 is the highest score.
A credit information Company popularly called CIC are specialized financial institutions which collect and maintain credit and loan related data of you and other citizens, who have availed loans and credit cards. The credit information Company creates a credit information report based on this financial data and assigns a credit score. Banks, NBFCs and Financial Institutions take a look at the credit score and then make a decision to sanction loans. TransUnion CIBIL popularly called CIBIL, Experian, Equifax and Highmark are the popular credit information Companies in India.
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Payment history: Your credit score is calculated based on credit history. It has a very high weightage of 35% in credit score. If you don’t repay loans and credit card dues on time, you get a bad credit score. Payment history tells banks how consistent and responsible you are with repayments.
Amount owed: This is the total amount borrowed from the bank or NBFC. It is the sum total of all dues to the lender. It has a very high weightage of 30% in credit score.
The length of credit history: It gives the duration of active accounts of credit. This is basically the duration of loans and credit cards. The longer the duration of loans, higher is the credit score. It would be wise not to close older credit cards which show steady repayments over a long time. Length of credit history has a very high weightage of 15% in credit score.
Credit mix: The credit mix consists of 4 types of credit. This is two in two pairs. You have the fixed and recurring line of credit. Then the secured and unsecured line of credit. What is the fixed and recurring line of credit?
You have loans which fall under the fixed line of credit where repayments are in EMIs and remain constant. Then the credit cards which are the revolving line of credit. You borrow with the credit card, make the repayments and borrow again.
You also have the secured and unsecured loans. The secured loans are secured against collateral like car loans, home loans or loan against property. You also have unsecured loans like personal loans where credit given has no security. You need a good credit mix of secured and unsecured loans. It has a weightage of 10% in credit score.
New accounts: Whenever a new loan account is opened, it adds value to the credit score. Avoid opening multiple accounts in a short span of time or multiple enquires which give the impression you are hungry for credit. Whenever you apply for credit (Make enquiries for loans), banks check your credit score. This is a hard enquiry which lowers credit score. You can check your credit score any number of times called a soft enquiry. This has no effect on credit score. It has a weightage of 10% in credit score.
SEE ALSO: Understand Credit Score
Get rid of loan and credit card dues: This rule remains constant across your life. Spend only amounts you can repay within the credit card billing cycle. Get rid of unpaid loans as fast as you can.
Check credit report: Your credit information report (CIR) contains details of loans and credit cards availed. Check to see if the loans reflected in your name are really availed. Many a time, data inaccuracies (Typing errors in names) result in loans reflecting in your name, even though you have not availed them. Get the bank to act and resolve the dispute. Your credit score improves.
Don’t close old credit cards: It’s popularly believed that closing old credit card accounts is good. If you have a good credit card account with timely repayments, it’s wise not to close it. A timely track record of repayments improves credit score.
Watch credit utilization ratio: Credit utilization ratio (CUR) is basically how much you currently owe, divided by credit limit. Maintain CUR of 30% or lower on credit card. The lender has confidence in repaying ability and you get a good credit score.
Get a secured credit card: Want a credit card even with a bad credit score? Opt for a secured credit card. This is a credit card secured against collateral like a fixed deposit. Take a secured credit card, make repayments in time and improve credit score.
How to get secured credit card? To get a secured credit card, open an FD with bank. The credit limit is set as a percentage of the amount in FD. The credit limit offered by bank is around 80% of fixed deposit value. If you don’t make the repayments on credit card, the bank liquidates the FD and accrued interest. Paying credit card dues on time means you continue to earn interest on FD. Axis Insta Easy Credit Cards, ICICI Instant Platinum Card, SBI Credit Cards, HDFC Credit Cards and IndusInd Credit Cards are some of the secured credit cards in India.
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SEE ALSO: 4 Common Myths On Cibil Score
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