What factors go behind the calculation of your credit score?

If you have ever used a credit card or applied for a loan, you sure know what a credit score means, both – to you and to the lender! A credit score is one of the most common measurement parameters considered by lenders customer credit risk assessment while lending a loan. It’s a numerical translation of the degree to which the customer is risk-free. Simply stated, the more your credit score, the merrier! Of course, there is a threshold beyond which this is applicable.

In India, the credit score ranges from 300 to 900, with a score above 750 considered to be loan worthy. But have you ever wondered where your score comes from and how exactly is it calculated? Well, to begin with, there are four credit bureaus in India who all have their own scoring models and hence, they assign different weights to different factors. Some may give more importance to your credit history while others may give more weight to the debt amount.

Hence, your credit score differs across all bureaus. Add to that, not all lenders report to all credit bureaus, which may further lead to a difference in score. We will list below some of the generic factors that all bureaus consider while calculating the credit score.

1. Payment History
Your payment history is a testimony to your payment habits – whether you make them timely, consistently or you default often. It also contains your encounters with bankruptcies, delinquencies, and collections. In some company reports, a 30-day delinquency can reduce your score by 100 points. Any missed or overdue payments, hampers your score and suggests that you are not consistent with repaying credit.
Tip: If you have multiple credit cards as well as loans, it is advised to set up reminders and alerts, to avoid missing payments or delaying them.

2. Outstanding debt
This is the amount you owe to the lender. Your unpaid dues reflect on your credit information report and have a significant contribution to your credit score. Hence, clearing off outstanding debts should always be a priority even if the amount be small.

3. Length of Credit History
Credit history is the total number of years considered from the time you opened your credit account. Long credit history is often preferred by lenders each time they perform a credit check, as it is easier to make decisions based on a longer track record. Hence, it is often advised to own a credit card right at the beginning of your life when you are financially more secure and able to repay on time as this will build a solid credit history and will eventually help you bag a loan later in your life when you actually need it.

4. Credit Mix
Your credit account should be a mix of secured and unsecured loans. Secured loans are those which are backed by collateral such as auto loans, home loans, etc, while unsecured include credit card and personal credit lines. A healthy mix of both indicates that you have experience in handling both types of loans, which is where you can score well.

5. Credit Utilization Ratio:
The credit utilization ratio is the amount of credit used in proportion to your credit limit. Ideally, this ratio should remain within 30% of your credit limit. For example, if your credit card limit is 1 lakh, you should spend under a cap of 30,000/-. Having a high credit exposure will send a red flag to lenders as it indicates you are at a higher risk of default.

You now have an idea why your credit score is what it is. If you live by the above considerations, your credit score will remain healthy or become better if it’s already not. If you want to check your credit score or download a free credit report, log into the CRIF credit bureau portal and download a credit report and a credit score, today!

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