What is Credit Score?
Credit score is a three-digit summary of credit worthiness. Credit Score depicts your ability to manage debt. It is very important to have a good Credit Score to avail credit of any form (home loan, personal loan, auto loan and so on), from banks and financial institutions. All the banks and financial institutions look at your credit score, before sanctioning a loan.
RBI has authorized companies registered under ‘The Credit Information Companies (Regulation) Act’, 2005, to generate Credit Ratings, Credit Reports and Credit Scores based on the information shared by banks and financial institutions. Credit Information Bureau India Ltd (CIBIL) is India's popular credit information bureau. Experian, CRIF High Mark and Equifax are the other credit information bureaus in India.
How to get your credit score for free
You must follow the below mentioned steps to check credit score for free on IndianMoney.com.
- Log on to https://indianmoney.com
- Click on ‘Get free credit score now’.
- Enter your Name, Address, Mobile Number, PAN and Date of Birth.
- You will receive an OTP on the Mobile Number that you entered. Enter this OTP to validate and proceed.
- Your Credit Score and Credit Information Report, CIR, would be displayed.
Who Computes Credit Score?
Reserve Bank of India (RBI) has authorized four credit information bureaus to compute Credit Score, based on the information and credit related transactions furnished by banks and financial institutions. Following are the list of bureaus authorized:
- The Credit Information Bureau (India) Limited called TransUnion CIBIL.
The most popular of the four is CIBIL. The CIBIL score is a three-digit number that depicts your credit worthiness. CIBIL Score ranges from 300 to 900. Individuals with no credit history will have a score of -1. It will be 0, in case overall credit history is less than six months.
Why IndianMoney is asking me for my PAN and Phone Details for the Credit Score?
Your credit score is based on all credit accounts. These credit accounts are linked to your PAN which in turn is linked to mobile number. It is very important that your Credit Score is not disclosed without your consent, as it is very confidential information. We cannot generate the credit score and report without PAN and mobile number. We collect PAN and phone details only to show you the credit score.
Why is IndianMoney giving Credit Score for free?
The IndianMoney.com Mission is to help people avail the right financial products, through personalized free financial education. Our Vision is to become the most admired and trusted financial education company in the World. It is important for us to keep the public, financially aware. IndianMoney.com has tied up with Experian to offer free credit score. IndianMoney.com is India’s leading financial education company which was formed to curb the misleading sales practices rampant in the financial services sector.
Want to know more on Credit Score? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.
Credit Score range and what it means?
Credit score ranges from 300-900, with 900 being the best.
- Credit Scores below 500 are considered to be ‘bad’ and individuals with this score are unlikely to receive credit from banks and financial institutions. Even if they were to receive, it would be at a higher interest rate.
- Credit score in the range of 500-700 is considered as ‘average’, and individuals with their Credit Score in this range are likely to receive secured loans. (Loans against collateral)
- Credit Scores in the range of 700-800 are considered ‘good’, it shows that debt is managed responsibly. Approval of loan takes lesser time and individuals are sanctioned unsecured loans.
- Credit score in the range of 800-900 is considered ‘excellent’, banks and financial institutions swiftly process and sanction loan applications if you have scores in this range. Individuals with Credit Score of 800 and above, get loans at low interest rates.
- Individuals with no credit history would have 0 Credit Score and would need a credit history of at least 6 months.
How is Credit Score calculated?
Below mentioned are the factors affecting Credit Score:
- Age, Residential Address and number of IDs like Passport, Driving License and so on.
- Types of credit received (home loan, personal loan, vehicle loan and so on)
- Length of credit history
- Credit repayment history, settlements and write-offs
- Number of recent Credit Score hard queries (enquiries made by banks and financial institutions on your credit history)
- Total sum of credit availed and paid back
- Credit utilization
Hard Enquiries versus Soft Enquiries:
The Credit Score enquiries you make are called ‘soft’ enquiries. Soft enquires have no impact on Credit Score. It is advised to check Credit Score at least once every three months. Soft enquiries are used to self monitor Credit Score. Self monitoring is important as you get to know of any wrong information in the bureau’s database. You need to inform the bureau if you find wrong information reflecting against your name and failing to do so would negatively impact Credit Score. Self monitoring also helps understand your current credit position.
Credit enquiries made by banks and financial institutions on your credit history are called ‘hard’ enquiries. Hard enquiries are made when a credit application is received. Hard enquiries negatively impact your Credit Score as it shows you to be credit hungry and in desperate need of financial support. This would make lenders hesitate on sanctioning loans. More the hesitation from lenders more would be the interest charged on borrowed amounts.
Credit Score Range and What It Means
A credit score ranges from 300 to 900. The lowest credit score is 300 and the highest credit score is 900.
A credit score of 800 and above:
A credit score of 800 and above is excellent. If you have a credit score above 800, banks are happy to sanction loans. You get loans easily and at low interest rates. People with credit score of 800 and above make loan repayments and credit card bill repayments in time, and there’s low chance of default.
A credit score between 700 to 800:
A credit score between 700 to 800 shows you to be financially responsible, when it comes to managing credit. This is a good credit score. You could have missed paying an EMI or the odd credit card bill. However, most of your repayments were in time. With optimum credit utilization ratio, banks are happy to lend, but at higher interest rates.
A credit score between 500 to 700:
A credit score between 500 to 700 is an average credit score. You better work on improving your credit score. You won’t get loans from the bank, but you can always improve credit score. Pay EMIs and credit card dues on time; maintain a healthy credit mix (Secured vs Unsecured loans), Check free credit report and credit score at IndianMoney.com, Get a secured credit card and don’t close old credit card accounts with long credit history. (This is payment track record).
Credit score below 500:
A credit score below 500 and you’re in deep trouble. This shows missed repayments, default on loans and credit cards and a general struggle to manage debt. Banks and NBFCs out rightly reject your loan application and even if loans are sanctioned, they are at very high interest rates.
|Credit Score Range|
|800 & Above||Excellent|
|500 & Below||Poor|
How to improve your Credit Score?
Below mentioned are the steps to improve your Credit Score:
- Check your Credit Score regularly: Soft enquiries have no impact on your Credit Score, so check your credit score regularly and contact CIBIL/Experian if there are any discrepancies.
- Make repayments on time: It is important to pay EMIs on time in order to get a good Credit Score. Delay in repayment, settlements and write offs would have adverse impact, which makes it difficult to avail loans.
- Limit your credit requests: Multiple credit applications show you to be credit hungry and in desperate need of financial support. This would raise concerns on your financial state and lenders would hesitate to sanction loans.
- Limit your credit utilization: Limit your credit utilization as much as possible. It is good to maintain a credit utilization ratio (CUR) within 30%. For example if you have a credit card with credit limit of Rs 1 Lakh a month, then try to spend less than Rs 30,000. Maximum credit utilization shows you are credit hungry.
- Minimum payments: This is the minimum amount that you need to pay your lender/bank to avoid fines and penalties. Pay off all outstanding credit card dues within the billing cycle + grace period.
- Try to avail secured loans over unsecured loans: It is good to maintain a ratio of 80:20 vis-a-vis secured vs unsecured loans. Secured loans have low interest rates as collateral is pledged.
Benefits of good Credit Score
Having good Credit Score means you have a proven track record of managing debt responsibly. Below mentioned are the benefits of having a good Credit Score.
- Swift processing of loan application: A good Credit Score indicates you are financially well organized. This makes banks and Financial Institutions process loan application swiftly.
- Low interest rates: You can negotiate for low interest rates with lenders.
- Waiver of processing fee: You are likely to get a waiver in processing and other handling fees, if you have a good Credit Score.
- Better loan balance transfer opportunities: Banks and financial institutions are likely to approve your request for top-up loans. You can smoothly transfer the loan balance across lenders.
5 Credit Score secrets
Follow these points to get a good Credit Score:
- Pay your credit card bills/EMIs within due date. Payments past due date and collection notices have negative impact on your Credit Score.
- Don’t close your old credit cards, pay off the pending balance and start using them responsibly. Make regular payments on time to improve your Credit Score.
- Check your Credit Score once every three months and inform credit bureaus if there are any discrepancies.
- Apply for and use credit cards only when needed, having multiple credit cards and not making the payments on time, would have a negative impact on your Credit Score.
- Don’t utilize the full credit limit on credit card; try to limit the credit usage to 30%.
Why you should check your Credit Score regularly?
It is extremely important to check your Credit Score, at least once every 6 months. You need to contact CIBIL/Experian when you find any discrepancies. If you have not availed a loan and it is showing up against your name, then you must get it removed at the earliest, if not it will have an adverse impact on your Credit Score.
Checking your Credit Score regularly lets you know your current credit position. Checking your own Credit Score is called soft enquiry and has no impact. There is no reason why you shouldn’t check it often. So, go ahead and check to avoid problems that might arise when you are applying for important loans like home loan.
5 Credit Score myths that you should be aware of
- Credit Score increases with increase in salary: This is totally wrong. Income has no relevance to Credit Score. Credit Score purely depends on your past credit records.
- Availing credit cards decreases your Credit Score: Availing credit cards and not repaying is what hampers Credit Score. Using credit cards and making timely payments would actually boost your Credit Score.
- If my Credit Score is bad, I cannot get any kind of credit card: You can still get a credit card with bad Credit Score, but it would be a secured credit card. A secured card is secured against fixed deposits. You can increase your Credit Score by making timely repayments and then apply for unsecured credit card once your Credit Score is good.
- Closing old credit cards would increase my Credit Score: This is actually the opposite. Re-using old credit cards with timely repayment would actually increase your Credit Score. This is because there is long credit history of timely repayments.
- Once I pay off my old debts, my Credit Score will improve: No, this is not true. All write-offs, late payments and settlements would reflect in your Credit Report for up to 7 years and your Credit Score will surely be impacted by this.
What are Credit Reports?
Credit Report is a report of all the loans and credit cards availed by you in the past. RBI has mandated all banks and financial institutions to share all credit related transactions with credit bureaus like CIBIL. Credit Report is mandatorily checked by banks and financial institutions when they receive credit applications. It is used to check how well you have handled debt in the past. Banks and financial institutions check for repayment history, credit utilization, settlements and write offs, all of which are mentioned in the Credit Report. Willingness to repay is seen as timely payment of EMIs and closure of loans on time.
Why Credit Reports are used?
Credit Report is basically your credit history. This shows loans and credit cards availed and also any slip-ups while repaying. Lenders would closely analyze your Credit Report before they sanction credit of any kind. Most of the lenders in India decide whether or not to lend money after going through credit report. If they decide to lend, then at what rate, would be decided based on your Credit Report. The lenders would charge higher interest rates if you have poor Credit Score.
Paying EMIs past due date with collection notice would stay in your Credit Report for up to 7 years, while bankruptcy would show up in your report for 10 years. Write-offs, settlements and missed payments are red flags in your Credit Report and lenders would deny loans as they think lending is risky. If they still decide to lend, then they would do so at a higher rate of interest. In short, your Credit Report decides loans and interest rates.
Understanding the Credit report through key terms:
There are few keywords that are used in Credit Report and are mentioned below:
- Credit Utilization Limit: This is the maximum credit sanctioned and you cannot exceed this.
- Credit Balance: Credit balanceis how much money you have used so far. The closer you are to credit limit, the lower your credit score. Credit utilization is usually calculated as a percentage that reflects how much credit you have utilized.
- Credit Score: Credit score is a numerical representation of an individual’s credit worthiness based on his/her credit history. Credit Score also depicts person’s ability to manage debt. It is very important to have good Credit Score in order to avail credit of any form, from banks and financial institutions.
- Grace Period: Period within which if you fully repay, you don’t have to pay interest on credit card. Most credit cards have grace period.
- Minimum Payment: This is the minimum amount of payment that you need to make to avoid penalties. Your lender may report this to credit bureaus, and it has an adverse impact on your Credit Score.
- Bankruptcy: Bankruptcyis the financial status of an individual or organization, who cannot repay debts to lenders. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.
- Write-offs: Banks and financial institutions write off (waive off)bad debts that are declared not recoverable (like a loan on a defunct business, or a credit card outstanding due that is defaulted), by removing it from their balance sheets. This is done when the borrower refuses to repay the loan or when the lender is not able to trace the borrower.
- Settlements: If the borrower is not able to repay the debt completely, then he/she can negotiate with the lender and make a one-time settlement which is less than the actual outstanding balance.
What is the Difference between Credit Score, Credit Rating and Credit Report?
Credit Score is a numerical representation of overall credit related transactions of an individual, while Credit Rating is an assessment of individual’s Credit Score. Credit Rating shows how good a Credit Score is. Credit Report is a detailed report which contains information related to all the credit accounts availed. This contains your past credit use and also any slip-ups that you go through while repaying. Lenders would closely analyze Credit Report before they sanction credit of any sort.
Importance of Credit Reports for Companies and Businesses
Just like Credit Score and Credit Reports for individuals, businesses also have Credit Score and Credit Report. Business Credit Report is a credit track record of businesses’ financial responsibility and companies, investors and financial organizations use this to determine whether or not the business is worthy to lend to or worth doing business with. There are many bureaus that compute business Credit Score. Similar to individual Credit Score, higher the number, lower would be the risk for financial organizations to lend.
Following factors generally impact business Credit Report. Bankruptcy, legal disputes on a property related to the business, outstanding balances and payment habits, business size and years on file. Good business Credit Report can help you expand the business. Most banks, financial institutions, investors, and companies heavily depend on your business Credit Report when setting loan terms, determining insurance premiums, increasing lines of credit, or considering your business as a possible partner.
As an entrepreneur, treating personal credit and business credit separately is important. This distinction can prevent possible financial barriers that can stop your enterprise from expanding. This saves you from personal liability if your business suffers loss which leads to bankruptcy.
FAQs on Credit Score and Credit Report
Q: How is CIBIL different from Experian?
A: CIBIL and Experian work in much the same way and generate credit report and credit score. Credit Score is a 3-digit number between 300 and 900 that shows credit worthiness of an individual. A credit score of 750 and above is generally considered good.
Q: Does renting or leasing a house affect a Credit Score in any way?
A: No, renting or leasing a house does not affect Credit Score in India in any way, unless your owner reports it to the credit bureaus. Renting or leasing a house is not considered to be any form of credit.
Q: Do late payments affect a credit score?
A: If you delay the payment for more than 30 days, then your lender may report it to the credit bureau. The extent of impact on your Credit Score depends on how late you make the payment.
Q: Does having too many credit cards affect a credit score?
A: Having too many credit cards is not advisable. Have limited number of credit cards and ensure you make timely payments. Having too many cards and missing payments on credit cards can hurt you by bringing down Credit Score. Ensure that you don’t utilize the full credit limit which would negatively impact your Credit Score.
Q: Who or what decides if I get my loan?
A: Your lender is the one who decides whether or not to sanction loans. Credit Score and Credit Report are two of the most important factors that would influence your lender.
Q: Why is PAN card required for checking the credit score?
A: PAN is one of the parameters that credit bureaus use to extract Credit Score. Having PAN is a must to check Credit Score yourself. This is because the database of credit bureaus is huge and many individuals can have same name, date of birth and address. But, PAN is the only unique parameter.
Q: Why do we need a phone number for credit score?
A: Phone number linked with your PAN or credit accounts is needed because the credit bureau has to be sure that the person viewing your Credit Score has your authorization. This authorization is enabled through an OTP sent on your phone number.
Q: Can credit score enquiries affect the score?
A: Soft enquiries have no impact on the Credit Score while hard enquiries have a negative impact. Lenders perform a hard enquiry each time you apply for credit.
Q: Will I get loans at lower interest rates considering I have Credit Score of 850?
A: Yes, you can negotiate interest rates with your lender. Lenders tend to sanction loans at lower interest rates on having good Credit Score.
Q: Can credit bureaus generate wrong Credit Scores?
A: Yes, when the information present in their database is wrong then wrong Credit Scores would be generated. So, you need to check Credit Score and Credit Report often to ensure there is no wrong information. You need to inform the credit bureaus on any wrong information, immediately.
Q: Does being a co-applicant or co-borrower for a loan reflect in my Credit Report?
A: Yes, it does show up in your Credit Report. Being a co-applicant or co-borrower means equal responsibility of repaying the loan, just like the main borrower.
Q: Does my Credit Score get impacted if I enquire about it?
A: No, self enquiry is considered as soft enquiry and this will not have any kind of impact on your Credit Score. Only hard enquires will impact your Credit Score.
Q: What Makes Your Credit Score Go Down?
A: Payment of EMIs past due dates, write-offs, settlements and going bankrupt would definitely get your Credit Score down. Bad Credit Score will decrease the chances of getting a loan sanctioned.