A credit score infers a numerical, 3-digit number that shows your credibility as an individual. Many credit agencies like Equifax, Experian, CIBIL and CRIF Highmark compute credit scores for loans. The score of Transunion is highly popular and most lenders use this credit score to evaluate your credibility as a borrower. So, if you are eyeing any loan, say, an HDFC loan, then an HDFC CIBIL score check is a must. To ensure your score is on a positive end, constant checking of your credit report is a must. Your CIBIL report is prepared upon your CIBIL score calculation by the bureau.
Read here to understand the classification of credit profiles and scores –
CIBIL score can be classified into 4 categories. The score ranges between 300 and 900. The score classification is as follows –
| Credit score range | Credit rating |
| 750 – 900 | Excellent |
| 600 – 750 | Good |
| 500 – 600 | Average |
| 300 – 500 | Poor |
A credit score is determined when banks and financial institutions submit organisation and individual data to the bureaus. The submitted data involve outstanding balances on credit options, default history and repayment schedules. Depending on this data, credit rating agencies estimate the credit score.
Top five parameters that make up your score –
How is your score computed, and how to enhance your score?
The credit score computation attributes the listed weights to distinct factors typically –
| Credit score factor | Attributed weights |
| Payment history | 35 per cent |
| Amount owed | 30 per cent |
| Credit history length | 15 per cent |
| Mix of credit | 10 per cent |
| History of employment | 10 per cent |
As explained above, a credit score is determined depending on the below-mentioned factors –
Repayment history – Credit reporting agencies review your repayment history against your repayment schedule. You must make constant repayments towards your loans and interest constituents to have a strong credit history. Also, they consider your defaults, collection history and bankruptcies. The higher the number of problems in your past credit record, the more it would impact your score.
The amount owed – This metric computes the current outstanding loan balance as well as the interest constituent on your distinct loans. Credit utilisation effectively measures the borrowed amount by the overall credit limit. Generally, lenders prefer your credit utilisation ratio (CUR) to be under 30 per cent to understand your credit risks. If the ratio is high, you are debt-heavy and have lower chances of future loan approvals.
Length of credit history – A long borrowing history and making constant payments ameliorates your credit score. In contrast, if you default on your payments or hold a very short credit history, credit rating agencies fail to evaluate your payment and default track history. Your score depends on this evaluation.
A mix of credit – You borrow loans for distinct purposes from distinct lenders. These loans include credit card debt, mortgages on vehicles and homes, etc. With enhanced ease of shopping, the age of digitalisation has seen various online transactions. If you regularly apply for new credit, it lowers your repayment potential. You might avail of unsecured and secured loans, which may lead to the pledging of assets. The higher your overall outstanding debt, the lower would be your overall credit score.
Employment history – Your history of employment matters because you might have an irregular employment history with an extremely short employment stint with various employers or you might have periods of unemployment in between jobs. Note that both cases may impact your steadiness as it profiles you as a highly risky individual. A long as well as steady employment history even shows you are at risk as you hold a stable income and can make payments regularly towards your outstanding debts.
Missing payments – While forming your credit score, the highest weightage is given to your repayment pattern. If you miss your repayments regularly, such as defaulting in your repayment pattern, this may lead to a lower score. It impacts your future borrowing capacity.
Also Check: CIBIL Score Calculation
The more you miss out on your loan payments or default, the more considerably your score is impacted. Your accumulated debt will show that you cannot pay.
Misconceptions about the negative impact on your score –
Your annual income impacts your score –
This parameter does not affect your credit score. Whatever your score is, if you are a disciplined individual and make your repayments on time, then it shows you as reliable and your score stays unimpacted. In contrast, if you hold a high income, however, profligate your spending habits, with zero discipline in spending behaviour, then your score will automatically be low.
Constantly tracking your score will reduce your score –
If you constantly review it, you can take apt measures to ameliorate your score. You can ameliorate your repayment schedule and make regular repayments on time. It would prevent any defaults and assist you to lower your outstanding dues and ameliorate your score.
Your score is the sole determinant of credit approvals by lenders –
A credit score is undoubtedly a crucial determinant of your credibility but it is not the sole determinant. In the above, you already saw a range of distinct weights allotted to distinct parameters above. You must ensure to monitor as well as regulate your standing in those distinct aspects carefully.
Closing your old accounts would enhance your score –
If you hold multiple credit cards, then you might be under the mistaken impression that closing an old and unused credit card would ameliorate your score. It is a misconception as scores are impacted more by your constant payment patterns as well as inadequate default history. Any unreliable repayment pattern impacts your score more. Also, lowering your outstanding debts as well as EMIs would assist increase your score.
Using your debit cards would assist to increase your score –
This is an incorrect assumption as when you use a debit card, you use your own fund in your accounts. Note that there are zero loans generated or any credit history triggered. Just your loan history, borrowings, and repayment history would determine your score.
