Everything you need to know about credit score

A 3-Step Credit Score Guide (That Everyone Needs To Know)

CHAPTER 1: Understanding the Basics

A credit score is a numerical, three-digit number that reflects your creditworthiness as an individual. Many agencies like TransUnion CIBIL, Experian, CRIF High Score, and Equifax calculate credit scores for personal loans. The credit score of TransUnion is popular; most lending institutions use this score to assess the creditworthiness of borrowers.

Let us use CIBIL scores better to understand the classification of credit scores and profiles.

We can classify a CIBIL score into four categories. It ranges from 300 on the lower side to 900 on the highest. The classification of the credit scores is as follows:

Range	Rating
300-500	Poor
500-600	Average
600-750	Good
750-900	Excellent

Source:cibil.com

They are determined when financial institutions and banks submit individual and organizational data to the credit bureaus. The submitted data include outstanding balances on new and other credit applications, repayment schedules, and default history. Based on this data, credit rating agencies estimate your credit score. Check your Credit Score now!

CHAPTER 2: Key Factors That Influence It

The calculation attributes the following weights to different factors typically:

Factors	Weightage attributed
Payment history	35%
Amount owed	30%
Length of credit history	15%
Credit mix	10%
Employment history	10%

Source:cibil.com

As explained above, credit scores are determined based on the following factors:

• Payment history: Credit reporting agencies analyze your payment history against your loan repayment schedule. You should make consistent payments towards your outstanding loan and interest balances to have a good credit history. They also consider your collection history, defaults, and any bankruptcies. The greater the number of issues in your credit history, the more it will impact your credit score.
• The amount owed: This metric measures the current outstanding loan balance and interest payments on your different loans. Credit utilization measures the amount borrowed by you divided by your overall credit limit. Typically, borrowers who borrow up to the maximum limit or the entire amount of their credit limits are considered potential risks. Usually, lenders prefer the borrowers’ credit utilization ratio to be within 30% to consider such borrowers’ reasonable credit risks. If this ratio is high, you’re considered to have high debt from various sources.
• The credit history length: A long history of borrowing and making regular payments improves one’s credit score. On the other hand, if we default on our payments or have a short credit history, credit rating agencies cannot reliably assess our payment and default track record.
• Credit mix: This implies that we borrow loans for different purposes from different lenders. We have credit card debt and mortgages on homes and vehicles. We may also have multiple credit cards from various banks because we want to optimize the benefits, incentives, and reward points. With the increased ease of shopping, the digital age has seen a lot of online transactions. We also have large loans for our house, vehicle, travel, etc. If you are someone who regularly applies for new credit, it reduces your repayment capacity. You may take secured and unsecured loans, resulting in the pledging of your assets.
• Employment history: Your employment history matters because you may have an irregular employment history with short employment stints with multiple employers or you may have periods of unemployment between jobs. Both cases will affect the steadiness of your cash inflows and profile you as a high-risk borrower. A long and steady employment history also shows that you are at a reasonable risk as you have a stable income and can make regular payments towards your outstanding amounts. 

Obvious truth: Missing Payments

The credit score gives the highest weightage to your repayment pattern. If you regularly miss making payments, such an irregular payment history or default in your payment pattern will result in a lower credit score. It will affect your future capacity to borrow. To check your credit score now, click here.

The longer your loan payments are missed, or defaults occur, the more significant the impact on your score. Your accumulated debts will signify that you cannot pay.

CHAPTER 3: Myths about the negative effect on credit score

1. Your income’s role in shaping creditworthiness.

This factor does not impact your credit score. If you are disciplined in making your repayments and show a reliable repayment history, your credit score will remain unimpacted. On the other hand, if you have a high income but are profligate in your spending habits and have no discipline in your spending behavior, your credit score will automatically be low.

2. Timely updates to stay financially healthy.

You can improve your payment schedule and make regular payments on time. It will prevent any defaults and help you to reduce your outstanding and improve your credit score.

3. Is credit score the only thing lenders consider for Loan Approval?

A credit score is undoubtedly vital in determining your creditworthiness, but it is not the sole determinant. You already saw the range of weights assigned to different factors above. You must monitor and regulate your standing in those various aspects carefully. If you’re looking to take a loan, click here to check your options now.

4. Closing old accounts will boost your score:

If you have multiple credit cards, you may be under the mistaken impression that closing the old, unused credit cards will improve your credit score. It is a myth because credit scores are affected more by your regular payment patterns and lack of default history. An unreliable repayment pattern affects your credit score more. Also, reducing your outstanding debts and EMIs will help enhance it.

5. The use of debit cards will help to enhance your scores.

This is a fallacious assumption, as when you use your debit cards, you use your own money in your accounts. There is no loan generated or credit history triggered. Only your borrowings, loan history, and repayment history will determine your credit score.

6. Credit repair bureaus will help you to improve your score.

If you find faults in your credit history, the credit bureaus will assist in raising it with the credit rating agencies and rectifying the weaknesses in your credit history.

Credit repair bureaus do not assist in repairing your credit history. You can only do this through prudent financial behavior, establishing a disciplined borrowing pattern, and responsible repayment. Only this financial discipline can help you to raise your credit ratings.

7. Does paying off debts erase old records?

It is also a myth. Once you create a credit history, it remains together in the credit assessment system for years.

Credit rating agencies will use your past credit history to underwrite your credit reports and provide them to lenders. It enables lending institutions to make a calculated decision about whether to lend to you or not.

8. Does getting a new credit card hurt your score?

Applying for a new credit card alone will not affect your score. The lender will make a hard inquiry into your credit history if you have multiple credit cards. Also, avoid sending various credit card applications. It will give rise to numerous hard questions. It will not improve your credit history.

9. Is a bad credit score permanent?

This one is another mistaken impression. If your financial behavior improves and is consistent in the future with regular repayments and no defaults, your credit score will improve. As mentioned above, your prudent financial management and prompt payments of debts will significantly help to improve your credit history.