A credit score is used by banks and NBFCs to assess the debt repayment capacity of borrowers. It is always expressed in terms of a three-digit number between 300 and 900. It is a numerical summary of creditworthiness.
A credit score of 500-600 is considered bad. The closer your credit score is to 900, the faster the loans get sanctioned. As credit rating bureaus use different algorithms to compute credit scores, they differ across bureaus. A lot has been spoken on credit scores. But, there are a few interesting facts on credit scores, many people do not know.
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The credit utilization ratio or CUR evaluates the amount due on credit card, relative to the total credit limit on the card. After credit history, it is the second most vital element of your credit score. The credit utilization ratio can be improved by increasing the credit limit. The ideal credit utilization ratio should be below 30%.
You may not be able to handle debt, if you overspend with credit cards. Don’t close credit cards which have a long track record of repayments. Use these cards, make repayments in time and build a good credit score.
See Also: What is a Credit Card?
Do Not Close Old Credit Cards
Many people have multiple credit cards and they tend to close unused or old credit cards. Closing old credit cards is not a good idea. This is because they have a track record of timely repayments.
Let’s assume that you hold two credit cards with the credit limit of Rs 5,000 each and the outstanding payment on one card is Rs 5,000. In this case, the credit utilization rate is 50%. If you decide to close the zero-balance credit card, the credit utilization ratio would increase from 50% to 100%.
See Also: Credit Card Meaning
Credit Scores are Based on Certain Considerations and Can be Obtained Online for Free
CIBIL score is commonly used across India. It is computed by considering credit history, the credit utilization ratio, credit mix and other factors. Credit history is of the prime importance in the computation process. All NBFCs and banks share the payment track record or the credit history of borrowers with CIBIL. The loan portfolio also impacts creditworthiness.
A higher portion of unsecured loans has a negative impact on your credibility. The portion of unsecured loans should be restricted to 30% according to financial experts. Other aspects that impact your credit score include multiple loan applications, the age and earning potential and so on. You can now get your credit score and credit report absolutely free of cost at IndianMoney.com.
See Also: 5 Reasons To Use Credit Cards
Credit Score is Not Mandatory to Get a Personal Financial Product
If you do not have sufficient credit history or have never availed a loan, you may not have a credit score. You can still apply for a home loan or a personal loan with no credit score. But, the chances of loan approvals are very low. A few financiers may lend, but at a higher rate of interest.
You will have to build credit history. If you do not hold credit cards, start using secured credit scores (credit cards secured against FDs) and make payments on time to increase the credit score. Usually, NBFCs are a little lenient vis-à-vis credit scores, but they charge a higher interest rate. Avail secured loans whenever possible as they charge a lower interest rate. You will have to pledge collateral/security to avail secured loans.
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