Check How Your Credit Score is Calculated and the Importance of Knowing the Process

A credit score is a three-digit number that signifies the creditworthiness of a person. It is the foremost factor that lenders verify before lending credit to loan applicants. The credit score gives them an overall idea of whether they can pay back the borrowed amount.

Therefore, it is essential to retain a healthy credit score. Now, you must be wondering how this credit score is calculated and why it is important for you. To learn more on this topic, keep reading.

How is Your Credit Score Calculated?

In India, there are four notable credit institutions CIBIL, Experian, Equifax, and HighMark. Every credit agency has its own performing style and credit scoring model by which they analyse your credit score. However, there are five main factors considered by the bureaus while computing your credit score. They are:

• Payment History

Your payment history is considered the most vital portion of your credit score, which takes 35% of the score into consideration. Your payment history displays whether you are clearing your dues on time, the number of times you missed a payment, how many dues have been missed in recent times, and the number of days you have missed since your due date.

If any payment is made 30 days after the due date, your lender will report it to credit bureaus immediately. Consequently, your credit score gets reduced. Apart from this, it also calculates the days left for you until a bill payment, the number of accounts showing delayed payments, etc. Precisely, the more you make timely payments, better will be your credit score and vice versa. Thus, you should stay cautious about maintaining a flawless payment history.

• Credit Utilisation

The second factor considered for computing credit score is the credit utilisation ratio. The amount you owe on credit cards or loans vs your cumulative credit limit covers 30% of your score. The ratio demonstrates the amount of credit that you have utilised opposed to the collective credit limit you are allowed. It is computed by diving your entire owed balance by your overall credit limit. To maintain a healthy credit score, utilizing 30-35% of your total credit limit is ideal. 

• Credit History Length

Your credit history covers 15% of your credit score. Therefore, your CIBIL score will enhance if you clear your dues timely and retain an accurate payment history for a long time. In general, credit age states the date wherein you got the approval for your very first loan.

If you retain older credit, your credit score will rise. Hence, holding a credit account for 2 to 3 years or more will be ideal for you to apply for further loans in future. Therefore, you should keep your credit accounts active and only apply for loans when necessary.

• Credit Mix

The credit mix covers 10% of your credit score. The number of credit accounts an individual holds, like loans, mortgages, credit cards, etc., altogether constitutes the credit mix. It is considered one of the main factors that evaluate your CIBIL score. 

A perfect credit mix is one that comprises a minimum of one secured and unsecured loan account with a long repayment period. Having a combination of various accounts like home loans, instalment loans, and credit cards will help you to boost your score.

• New Credit

The current credit activity includes 10% of your credit score. If you have opened numerous credit accounts, you will face financial problems sooner or later and end up lowering your credit score. Thus, you should avoid opening more loan accounts and opting for credit cards without thinking about your affordability.

Importance of Credit Score

Credit is an important component that shows your lenders about your capability to repay the loans. Thus, you must retain a healthy CIBIL score to grab the advantageous elements offered by the lenders like fast approval, lower interest rates, longer tenure, and so on. The importance of CIBIL score are as follows:

• Cheaper Interest Rates and Better Offers on Credit Items

The top benefit of keeping a healthy credit score is that financial institutions may provide you with loans and credit cards at cheaper interest rates. Furthermore, it can be advantageous for you while opting for a higher loan amount, discount on processing charges, etc.

• Increase Your Chances for Loan and Credit Card Approval

Credit scores of 750 or above signal the creditworthiness of an individual. This inspires financial institutions take quicker decisions regarding credit applications and enables applicants to avail of loans whenever they need them. Thus, having a good credit score increases the chances of getting quick loan and credit card approval.

• Opportunity to Opt for Rewarding Credit Cards

Having a healthy credit score makes you entitled to opt for the top rewarding credit cards as well as those that provide the least interest rates and top rewards, like cashback, travel points, and so on.

• Access to Pre-approved Loan Offers

A healthy credit score enables you to get pre-approved loan offers. Financial institutions generally provide pre-approved loan offers to potential customers with a steady credit history.

So, considering the importance of maintaining a good credit score, it is important for you to check your credit score on a regular basis. 

Steps to Check CIBIL Score

The steps to check the CIBIL score are as follows:

Step 1: Visit the official website of CIBIL.

Step 2: Click on ‘Get your CIBIL Score’.

Step 3: Enter your credentials.

Step 4: Attach your ID proof, date of birth, PIN code, and contact number.

Step 5: Select ‘Accept’ and continue.

Step 6: You will get an OTP on your registered mobile number that you have to enter

Step 7: Click on ‘Go to Dashboard’ and verify your credit score.

Step 8: You will be redirected to the website at which you can check your CIBIL score.

Now you have understood how credit score is calculated and the importance of knowing about it. A healthy credit score makes you a valuable customer to the lenders. So, consider the above pointers that determine your credit score, check it regularly and retain a stable credit score so that you can apply for a loan whenever necessary.