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All about Credit Score and importance of the same

The concept of Credit Score is still quite new to India. As such, very few people are aware of it and ignorant about its significance.

In fact, it is known more commonly by a specific name... CIBIL Score (we shall see later, why).

Therefore, I suppose a detailed overview about it would be quite useful.

What is a Credit Score?
Credit Score is a 3-digit number, that summarizes the quality of your borrowing history.

The details of all your loans availed in the past, are analyzed to arrive at a single number — called the Credit Score — which determines whether you are "good borrower" or a "bad borrower".

A Credit Score ranges from 300 to 900.

Who determines this Credit Score?
Your Credit Score is determined and maintained by the credit information companies (CICs), approved by the Reserve Bank of India.

Presently, there are four such approved CICs in India, viz.:
- Credit Information Bureau (India) Ltd. (CIBIL) 
- Experian Credit Information Co. of India Pvt. Ltd.
- Equifax Credit Information Services Pvt. Ltd.
- CRIF High Mark Credit Information Services

CIBIL is the oldest among the lot and they were the first to start with your Credit Reports and Scores. That is why Credit Report / Score is often referred to as CIBIL report too.

So Credit Score is the correct generic term; whereas CIBIL Score is specific and refers to the credit scrore given by the company CIBIL.

Everything you wanted to know about Credit Score and didn't know whom to ask

What details do these companies look into?
The key parameters that go into determining your Credit Score include mainly...
... How many loans you have availed till date
... What was the amount sanctioned and the balance outstanding now
... Percentage of loan utilized out of the total sanctioned limit 
... How much is secured borrowing and how much unsecured
... What loan amount have you stood guarantor for
... Has your repayment been timely or are there any delays, defaults or write-offs
... Number of loan enquiries you have made in the past

Timely payment is, naturally, a very critical factor. However, as you will note, even things like utilization, number of enquiries and extent of unsecured loans too, can affect your Credit Score.

How do credit information companies access these details?
As mentioned earlier, these companies are approved by RBI. They work under the Rules and Regulations prescribed, namely:
a) The Credit Information Companies (Regulation) Act, 2005 ("CIC Act")
b) Credit Information Companies Regulations, 2006 ("Regulations")
c) Credit Information Companies Rules, 2006 ("Rules")

Accordingly, all banks, financial institutions, credit card companies, NBFCs, etc. have to share your loan details with these CICs. 

Further, these lenders have to share your repayment and other relevant loan-related information with them on a monthly basis, so that your credit history is up-to-date.

In other words, whenever you approach any institution for say a home loan, vehicle loan, personal loan, credit card or any such borrowing, these details are forwarded to the CICs. (By the way, details of your deposits, investments, savings accounts etc. are NOT shared with the CICs.)

Accordingly, based on this data, CICs are able to generate your Credit Information Reports and Credit Scores.

How to find out your Credit Score
You can get your Credit Score and Credit Information Report from the above-mentioned credit information companies, by paying a fee as stipulated by them.

In fact, given that errors are not uncommon, it is good to check your Score from time to time. Even a small mistake could badly spoil your score. It is better to get it rectified in time. Last minute corrections, when you have already applied for a loan, may not be possible.

What is a "good" Credit Score
A score of 750 and above is considered as a good score by the lenders. 

Why is Credit Score so important?
A high score signifies that you are a prudent and low-risk borrower. You are most likely to make timely payments of your EMIs and other loan obligations.

In other words, you are the most eligible borrower.

Banks would love to have you as their customer. Therefore, a good score improves your chances of getting the loan. You won't have to run around to raise a loan. 

More importantly, banks would offer you much cheaper interest rates, as compared to low credit-score high-risk borrowers. Since borrowing has become common nowadays... for car, house, education, etc... it would save you tons of money on the interest cost

What if you have bad Credit Score?
It is important to note that a bad score DOES NOT necessarily disqualify you for a loan. There are many other factors — your job profile, income, liabilities, educational background, age, dependents, etc. — that banks take into account while evaluating your loan application. 

But yes, a low score could definitely make it more difficult to get a loan. And the cost too would be higher. Given the high-risk, banks would like to compensate this with a risk premium in the form of higher interest rate. 

Since, even 1% difference can increase the interest outflow substantially, it makes ample financial sense to improve your score.

How to improve your Credit Score?
If your past track record or loan servicing is not good, it will reflect in a poor Credit Score. But that doesn't mean that you have to live with it. No. You can improve upon it and ensure that in future you too are eligible for loans... and on competitive terms. For this, refer to the Top 5 Tips To Enhance Your Credit Score. Of course, let me warn you, that it will take time to negate and erase the earlier bad record with the new good record. So you have to be patient about it.

This, I believe is everything you wanted to know about Credit Score, but didn't know whom to ask.


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