Credit Score and Financial Health
Credit score plays an important role in determining the overall eligibility of a borrower when applying for a loan. However, to ensure the approval of the loan or credit product by the lender, complete and reliable knowledge of the borrower's financial health and credit, will shape not only his credit request but also his future financial credit needs. It is a prerequisite.
What is a credit score?
A credit score is a measure of a person's reliability in repaying debts and loans based on a person's credit history and financial health. This three-digit number or index indicates the eligibility and creditworthiness of an individual to a lender, be it a bank or a non-banking financial company (NBFC).
To reduce default risk, traditional and new lenders, mortgage companies, credit card companies, etc. actively check a borrower's credit score history before determining the appropriate loan amount and interest rate to charge. It varies from borrower to borrower.
In India, credit scores from bureaus such as TransUnion CIBIL range from 300 to 900. Scores closer to 900 indicate a lower risk of default; many lenders treat scores of about 750 and above as strong, although each lender sets its own criteria. You are entitled to one free credit report a year from each credit bureau.
How credit scores affect your finances
Lenders use your score together with your income, existing loans and repayment history. It mainly affects:
- Loan approval: a low score, recent defaults or many recent loan enquiries can lead to rejection.
- Interest rate and terms: borrowers with stronger scores are usually offered lower interest rates, higher amounts or longer tenures.
- Credit cards: issuers use your score to decide approval and your credit limit.
- Large loans: home loans, loans against property and business loans involve closer scrutiny of your credit history.
How to improve your credit score
If you plan to apply for a loan or credit card soon, these steps help:
- Pay every EMI and card bill on time: repayment history has the biggest influence on your score. Auto-debit helps you avoid missed dates.
- Pay credit card bills in full: paying only the minimum amount due leaves the balance to attract interest and keeps your utilisation high.
- Keep credit utilisation low: try to use only a modest share of your total card limits.
- Avoid many applications at once: each hard enquiry by a lender is recorded on your report.
- Check your credit report for errors: raise a dispute with the credit bureau if you find a loan you did not take or an incorrect status.
- Consider consolidation carefully: combining several high-interest debts into one lower-rate loan can help, but only if the total cost is lower and you do not take on new debt.