Credit Score

Credit Score in India: All You Need to Know

At some point in our lives, we may need to borrow money from a bank, finance company, or online lender for different reasons like education, emergencies, weddings, home loans, and more. When you apply for a loan, the lender checks your credit score and history to see if you are a reliable borrower. Your credit score is a three-digit number between 300 to 900 that helps the lender determine your creditworthiness and interest rates.

In India, there are four credit bureaus (Equifax, Experian, CIBIL, and CRIF Highmark) that provide credit scores. The importance of credit scores is becoming more widespread among the Indian population as more people turn to banks for financial help. Let’s learn more about what credit scores are and why they are essential.

What is a Credit Score?

A credit score is a numerical representation of your creditworthiness, which is calculated based on your credit history. In other words, it’s a three-digit number that shows how likely you are to repay any money that you borrow.

For example, let’s say you want to take out a loan to buy a car. The lender will check your credit score and credit history to see how reliable you are at repaying loans. If you have a high credit score, it indicates that you have a good track record of paying back your debts on time. This makes you a less risky borrower, and the lender may offer you a lower interest rate or approve your loan application faster.

On the other hand, if you have a low credit score, it suggests that you may have a history of missing payments or defaulting on loans. This makes you a higher risk borrower, and the lender may either reject your loan application or offer you a higher interest rate to compensate for the risk.

So, having a good credit score is essential if you want to borrow money at reasonable interest rates and with less hassle.

How to Get Your Free Credit Score?

To get your free credit score in India, you can follow these steps:

1. Visit the website of any of the four credit bureaus authorized by the Reserve Bank of India, namely CIBIL, Equifax, Experian, or CRIF Highmark.
2. Look for the option to check your credit score for free on the homepage of the website.
3. Fill out the form with your personal details, including your name, address, and PAN (Permanent Account Number) card number.
4. Authenticate your identity by answering some security questions based on your credit history.
5. Once you have completed the authentication process, you will be able to see your credit score and credit report on the website.

Is checking credit score on third-party websites safe?

Although you can get your credit score from all four credit bureaus, it’s easier to check it on third-party websites because the process is simple and free all year round. Credit bureaus only provide your credit score and report for free once a year. If you want to access your credit report multiple times from the credit bureaus, you may have to pay a fee. But third-party financial websites provide your score for free all the time.

When you check your credit score on a third-party website, your personal details are safe. Each website has a tie-up with one of the four bureaus and fetches your credit score from their records. These third-party websites ensure your details are safe and you can check your score multiple times for free.

Some people worry that checking their credit score on these sites will reduce it. However, your credit score is only affected if a lender checks it when you apply for a loan or credit card.

Why does credit score vary from bureau to bureau in India?

Here are some possible reasons why credit scores may vary from bureau to bureau in India:

1. Different algorithms: Each credit bureau uses its own proprietary algorithm to calculate credit scores, which may result in variations in the scores provided by different bureaus.
2. Different data sources: Credit bureaus may collect credit information from different sources, such as banks, NBFCs, credit card companies, and other financial institutions. Differences in the type and quality of data collected may also lead to variations in credit scores.
3. Different credit histories: Each credit bureau may have access to different credit histories, as not all lenders report to all bureaus. This means that credit histories may differ across bureaus, which can affect credit scores.
4. Errors or omissions: Credit reports may contain errors or omissions, such as incorrect personal information or missing credit accounts. These errors may affect credit scores and may vary across bureaus.
5. Time lags: Credit information may not be updated in real-time, which can lead to differences in credit scores across bureaus. Some lenders may also report to one bureau before reporting to another, resulting in variations in credit scores.

Why Should I check my Credit Score?

It’s crucial to keep track of your credit score because it helps you know your chances of getting approved for a loan or credit card. You should also monitor your score to check if it goes down or if there’s a mistake made by the credit agencies while calculating it. This way, you can correct any errors or fix any problems quickly.

Does my Credit Score Get Impacted if I Enquire About it?

There are two types of credit score enquiries – hard and soft. Hard enquiries can lower your credit score, while soft enquiries do not affect it.

When you check your credit score yourself, it is a soft enquiry and does not impact your score. However, when you apply for a loan or credit card, the lender will make a hard enquiry that can lower your credit score by a few points. Therefore, it’s best not to apply to too many lenders at once as this can hurt your credit score.

So, be careful when applying for credit and try to avoid multiple applications at the same time to protect your credit score.

How can you maintain a good credit score in India?

Maintaining a good credit score is important if you want to borrow money at reasonable interest rates and with less hassle. Here are some tips to help you maintain a good credit score:

1. Pay your bills on time: Pay your credit card bill or loan EMI on time as regular and on-time bill payment has the highest weightage when calculating your credit score.
2. Keep your credit utilization low: Keep your overall credit utilization low. Don’t use a lot of credit, especially maxing out your credit limit as it can negatively affect your credit score. The recommended credit utilization ratio is 30%.
3. Don’t close old credit cards: When you close old credit cards, it reduces your overall credit limit, making it difficult to stay below the ideal credit utilization ratio. Also, closed accounts are given less weightage by credit bureaus, which could bring down your credit score.
4. Limit new credit application: Limit new credit application within a short time period as each hard enquiry listed on your credit report brings down your credit score. Also, too many enquiries make lenders think you are desperate for credit and don’t manage your finances well.
5. Monitor your credit report regularly: Check your credit report regularly for mistakes as errors could bring down your credit score. You can get one free credit report each year from credit bureaus mandated by RBI. It’s important to review your credit report at least twice a year.

Is 700 a Good Credit Score?

Improving your credit score can take time and effort, but it’s worth it. Even if you’re new to credit, you’re likely working to make your credit score better. A score of 700 isn’t perfect, but it’s considered good by most lenders. By practicing good credit habits, you can increase your chances of achieving a 700 credit score.

If your credit score is 700, it can still help you qualify for better deals on credit cards, personal loans, and mortgages. But, it won’t provide access to the same type of terms as someone with a credit score above 700. Lenders consider other factors like income and employment status while determining creditworthiness.

What a 700 credit score can get you?

With a credit score of 700, you’re in the “good” credit range, which means you’re more likely to qualify for loans and credit cards with lower interest rates.

Car Loans

For car loans, a credit score of 661 or higher is usually required to get the best rates. On average, people with credit scores between 661 and 780 paid an interest rate of 4.03% for a new car and 5.53% for a used car in 2022.

Mortgages 

While a score of 700 may not result in the best possible interest rate and terms, it could still qualify you for a mortgage with competitive rates and favorable terms. It’s important to keep in mind that mortgage lenders consider other factors as well, such as your debt-to-income ratio, employment history, and the size of your down payment. These factors, in combination with your credit score, will be used to determine your creditworthiness and the terms of your mortgage. A credit score of 700 can still put you in a good position to secure a mortgage and achieve your homeownership goals.

Credit Cards or Personal loans

When looking for credit cards or personal loans, pay attention to the required credit score. Applying for too many loans or credit cards at once can temporarily lower your score, so it’s important to make sure you’re likely to be approved. With a credit score of 700, you should have plenty of options for credit cards and personal loans, and a higher score will help you get better interest rates.

Strategies to build your 700 credit score

If you have a credit score of 700 or above, you’re doing a good job, but there are ways to make it even better. The higher your score, the better rates you can get. You can improve your credit score by focusing on these factors:

1. Payment history: Pay your bills on time and avoid late payments. You can set up automatic payments to ensure you don’t miss any payments.
2. Credit utilization: Use only 30% or less of your credit limit on each card. Using less than 10% is even better. You can ask your card issuer to increase your limit, but don’t spend more, or it will hurt your utilization.
3. Length of credit history: The longer you have a credit history, the better. Don’t close credit cards unless you have a good reason, like a high annual fee.
4. Credit applications: Too many credit applications can hurt your score. Space out your applications by about six months.
5. Credit mix: Having a mix of installment loans and revolving credit, like credit cards, is good for your score.

Benefits of maintaining a High Credit Score

Maintaining a good credit score comes with several benefits that include:

• Higher chances of getting approved for loans or credit cards, because it shows that you are trustworthy and less risky for the lender.

• Lower interest rates on loans, which means you’ll pay less money back over time.
• Faster approval for your loan or credit card application, because the lender sees you as a reliable borrower.
• Access to pre-approved loans that you’re eligible for, making it easier to get the money you need.
• Higher credit card limits, which means you can spend more without worrying about maxing out your card.
• Discounts on processing fees and other charges, which can save you money in the long run.

What is the Difference between a Credit Score, Credit Rating, and a Credit Report?

Understanding the Credit Reports through key terms

If you haven’t taken any loan or credit card before, your credit score may show an NA or NH, which means there isn’t enough activity to generate a report. Here are some other terms you may see on a credit report:

• STD: This means that the borrower has made all the payments on time.
• SMA: This indicates that the borrower has delayed the repayments.
• DBT: It means that the borrower hasn’t made any payments for over a year, and the credit information is doubtful.
• LSS: A credit report can show LSS if the borrower has defaulted on a loan or credit card account for a long time, or the lender has reported it as a loss.
• DPD: It shows the number of days an account has not received payment.
• Written Off/Settled Status: This indicates a situation where the borrower couldn’t make the repayment, but an agreement was reached with the lender for either a repayment plan or a settlement.

Reading a Credit Report

A credit report is a detailed document that shows a person’s credit history. It includes information about credit accounts, such as credit cards, loans, and other types of credit. The report also shows payment history, credit limit, account balance, and whether loans are open or closed. It also includes information on new credit inquiries, collections, and public records such as bankruptcy or tax liens.

Here is a breakdown of how to read a credit report:

• Personal Information: This section shows personal details like name, address, and date of birth. It’s important to check this information for accuracy, as errors could be a sign of fraud.
• Account Information: This section shows details of present and past credit accounts, including the date of opening, creditor name, current balance, credit limit, payment history, account type, and ownership. Check this section carefully as it’s quite detailed.
• Public Records: This section shows any bankruptcies, tax liens, or collections. Check the dates provided, as they affect how long the records will appear on the credit report and impact the credit score.
• Inquiries: This section shows any companies that have made inquiries about the person’s credit score. Multiple credit inquiries can negatively impact the credit score. Soft inquiries, which are generated for promotional purposes, do not affect the credit score.

Importance of Credit Reports for Companies and Businesses

Just like how individuals have credit reports, businesses also have credit reports and ratings prepared by Credit Information Companies (CICs). These reports and ratings are used by suppliers and government agencies while providing utility and business contracts.

Business credit reports contain information about the establishment, owners/directors, employees, profits and losses, liabilities, assets, and any pending court cases. The cost of these reports can vary depending on the amount and type of information provided.

Frequently Asked Questions (FAQs)

Credit Score