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Frequently Asked Questions About Credit Score

When you come across advertisements like “Check your credit score for free”, some may be wondering what a credit score is, why it is given for free and what I can do with it. Is it in any way beneficial for me if I check it? Questions like this would have surely occupied your mind.

If you had already been familiar with the term credit score, questions about good score, highest score, bad score, low score, how the credit score is generated etc. would have struck your mind inevitably. Your every single query related to credit score is answered here. To begin with, lets us first understand what a credit score is. Later, you will find more topics elaborating on the relationship between credit score and credit products.

What is a credit score?

Every performance is rated, be it a movie, education, job, food etc. Likewise, your credit performance is evaluated and rated accordingly. This rating is called credit score which ranges between 300 to 900. You will have a credit score only after you have borrowed from banks, NBFCs or online lenders. If you have not taken any credit before, then you will not have a credit score.

Who issues the credit score?

There are 4 credit bureaus in India namely, Equifax, CIBIL, High Mark and Experian, who calculate and issue the credit score and credit report. The lenders report the credit activities of their customers to the bureaus at regular intervals. Based on the report, the credit bureaus, with their own formula of rating procedure, bring out the credit score or credit, as stated earlier it ranges between 300-900.

How is the credit score calculated?

It could be puzzling if you do not know on what basis the credit score is calculated and what goes into the calculation of this three-digit number. Each credit bureau generally uses similar parameters to bring out the score. However, you might find variance in the result as they allocate different value to each parameter. Following are the parameters that truly determine your credit score.

• 1. Payment history – On-time and consistent repayment provides a positive score
• 2. Credit Utilization Ratio– Having low credit usage on your credit card provides a much-needed boost
• 3. Credit history – The longer the credit history, the higher the credit score.
• 4. Credit mix- Having a mix of secured and unsecured credit is a proof to the lender that you are able to handle the credit efficiently
• 5. Hard enquiry – Taking out credits within short time negatively affects your credit score as there are too many hard enquiries involved

What is a good credit score?

Banks and NBFCs consider you a creditworthy individual if you have credit score of 750 and above in general. After having taken a loan or used a credit card, you would generally have a minimum score of 740 or above. With consistent repayment, the score will gradually increase, and you can enjoy benefits on future loan application.

Delinquencies, settlements, foreclosure, defaulting on payments, high credit utilisation ratio etc. could lead to a reduced credit score. The negative score will remain on your report until you have settled the issues with the lender.

Why should I give importance to the credit score?

You must be wondering if it really makes sense to give a lot of importance to credit score. To be honest, it does make sense, especially when you want to save a considerable money on future loans.

With banks openly declaring a reduced interest rate for customers with good credit score, you can definitely leverage your credit score to enjoy financial benefits. A small reduction in the interest rate on big ticket loans can save you a lot with the power of compounding to reckon with.

When you could save 1000 rupees on a home loan with good credit score, you can invest the amount in a saving instrument and use it for an emergency, vacation, education etc.

What causes poor or bad credit?

A poor credit score does not happen by itself. It is the outcome of your credit behaviour. Following are some of the causes that could affect your credit score.

Irregular Payment history: Inconsistent, missed, or irregular payment history on your past loans and credit cards can lower your credit score

Write-offs and Settlements: Any reports by lender (banks / financial institutions) against your name stating written off or previously settled facilities, are likely to raise the risk perception and cause a negative impression.

High credit utilisation: If you are using more than 50 percent of your credit limit on your credit card, there are chances your credit score will get affected.

High number of Enquiries: If you have applied for a number of loans in the recent past, the chances of your new loan getting approved is likely to suffer. Simply put, this credit behaviour indicates that you are "Credit Hungry" and in urgent need of money. It is likely to make lenders more cautious while evaluating your credit application.

What can I do if have a poor credit score? Can it be improved?

Most people go through this kind of situation. Tough times are unavoidable and there are chances, you may have defaulted on your repayment. With the bad credit, you might get stuck up in a sticky situation where getting a credit would seem impossible.

A poor credit score is not permanent, you can always improve it by taking appropriate steps. Though it might take a while, it is worth improving your score and apply for a fresh loan instead of getting your application rejected which further reduced your score.

When repairing your own credit seems bit difficult, but with a little help it is possible.

Can I get a loan or credit card with poor credit score?

Some of us might fall into bad credit and would be still looking for funds to manage an emergency or immediate need. Is there a way to access funds with bad credit? The answer would be ‘Yes’. You can still get a loan or credit card by pledging a collateral. Getting an unsecured loan or would be difficult with bad credit. But you can always go for gold loan or secured credit card where the approval is guaranteed.

Secured credit card can be availed against a fixed deposit. About 80% value of the FD is provided as credit limit on the card. If you default on the bill payment, the lender can deduct it from the fixed deposit.

How long does it take to improve my credit score?

The process is, lenders have a timeline to report your credit activity to the credit bureaus. It could be once a month, quarterly or twice a year. Whatever may be the time period, you need to keep a disciplined credit behaviour to improve your credit score. Clear all your past dues to the lender and it gets reported to the bureaus. It could take up to 6 months to see a change in the score if you have rectified your credit mistake.

Check out the monthly monitoring for updates on the credit score. You can subscribe to our services and keep yourself updated and informed about your credit activities.

How long does a default remain on my credit report?

Once you have defaulted on your loan repayment or credit card bill payment, it gets recorded on your credit report. Though you may have cleared the past dues, the default is going to stay for a long time on your report. It can take several years (generally up to 7 years) to drop default off your credit report.

Repayment has a considerable weightage on your credit score. Hence, every single repayment you make has an implication on the score. The best way to maintain a good score is to be consistent with the repayment.

How often can I check my credit score?

There exists a misconception that frequently checking the credit score will reduce it. Soft credit checks from customers do not impact your or bring down your credit score. You can check your credit score any number of times as you wish, and it does not affect your score.

Checking your credit score helps you keep updated about your credit activities. It is also an opportunity to look for errors on your credit report and raise a dispute for resolution with the lender.

Why is it important to check my credit score?

Your credit score directly impacts your ability to obtain a credit card, buy a car or home, rent an apartment, or even get a new job. Knowing how to read your credit report, correcting falsely reported information and ensuring accuracy of your credit report are in your best interests.

If you are applying for a loan or a credit card, banks check your credit score to view your credit worthiness. It is advisable that you check your credit score before approaching the lender to avoid the risk of rejection. Keep in mind, rejection of a loan application only knocks down your credit score by a few points.

Will the credit score generated by each credit bureau be the same?

No, you are very likely to get a different credit score from each bureau. Though the information shared by the lenders across the credit bureaus are the same, the credit score generated may not be the same as each has its own scoring method. Understanding the module used by the bureaus and other factors involved are vital to comprehend the changes in the credit score.

Now that all four credit bureaus do provide their score for free once a year, individuals can look to obtain from all sources and compare.

Reporting pattern: Banks and NBFCs report their customers’ credit details such as borrowings, credit card usage, foreclosure, settlement etc. to the credit bureaus periodically.

Lenders might have subscribed and registered to the services of certain bureaus and directly pass out information of the borrowers to them directly and immediately while it might reach later for other bureaus. This time difference in reporting effects a variation in credit score calculation eventually.

Weightage: The credit information companies do not use uniform scoring mechanism to compute the credit score. The weightage given to various parameters is slightly different for every credit bureau. This could result in a minor change with the credit score.

For example, one of the credit bureaus give 30% of weightage to payment history while it is lesser or more for other bureaus. Similarly, for every other parameter, the variation in the scoring module contributes to a small difference.

How can I fix the errors on my credit report?

Firstly, you need to get your credit report and review it. Once you have spotted the errors, you can take it up with the lenders who reported it to the credit bureaus. You can also visit the official website of the credit bureaus and raise an online dispute resolution to clear the inaccurate information. You will get a response from the bureau within a month of raising the dispute. The bureau will get in touch with the lender and re-confirm the information and update the changes.

What if I do not have a credit score? How can I get a loan or credit card?

Since you are new to credit, banks can’t look into your credit score and history to determine whether or not to lend you money. In these cases, banks often look at other factors to determine your repayment capacity (such as your income and employment stability) and decide whether you are creditworthy or not.

If you are new to credit, then you can follow these tips to build a good credit score.

Get a secured credit card: A secured credit card can be availed against a fixed deposit and helps in building a positive credit history, provided you pay all your bills on time.

Short-term loans: Banks, NBFCs and online lenders provide short-term personal loans to individuals who have not borrowed before.

Make sure that you don’t apply for too many credit cards/loan products in a short period of time.

Conclusion

You must be falling under the following three categories: Having no credit score, low score or good score. Take necessary steps according to your current status and try to become credit healthy.