What is a Credit Score?

A credit score is a numeric summary of your credit history, a commonly used method for lenders to predict the likelihood that you will repay any loans they make to you.

Credit scores range from 300 (poor) to 900 (excellent). Higher scores illustrate consistently good credit histories, including on-time payments, within means borrowings and long credit history. Lower scores indicate borrowers may be risky investments because of late payments or overextended use of credit.

There are no exact cutoffs for good scores or bad scores, but there are guidelines for each. Most lenders view scores above 700 as ideal and scores below 600 as problematic.

Consumers are becoming more aware of how raising their credit score improves their financial outlook. When people are aware of their credit score, consumer can work on problematic area and get it repair.

How Does a Credit Score Work?

A credit score or cibil score lets lenders decide whether someone is eligible for a loan. When a person uses credit (like a loan, credit card, or EMI), the lender sends the repayment record to the credit bureaus. These bureaus collect the data to calculate the score depending on payment behaviour and other parameters.

The score increases if payments are made on time. A lender should use the credit limit wisely to improve the score. Delayed bills or using credit beyond limits can decrease the score. People may not know why loan applications get rejected. One reason might be a poor credit score. That is the reason why you should understand what is a credit score.

How is Credit Score Calculated?

Here's how a credit score gets calculated –

1. Repayment History:Shows whether payments were made timely. Missed or late payments may reduce the score while hurting your chances of loan approval.

2. Credit Usage:It reflects how much credit is being used. Using less than 30% of the total limit is seen as responsible behaviour.

3. Credit History Length:The longer your credit accounts stay active, the more they support your score. A long track record builds trust with lenders.

4. Credit Type:Having multiple credit cards & loans shows that you can manage different credit products well & improve creditworthiness.

5. Recent Credit Activity: Applying for many loans or credit cards in a short time might bring your score down.

Major Components in The Equation That Produces Your Credit Score

1. Payment history: Do you pay on time? Do you pay the full balance, the minimum or somewhere in between?

 2. Amounts owed: How much of the credit you’re allowed, do you use? If you exceed the limit, you are seen as high risk and penalized. If you use less of your credit allowed, you’re considered a safe borrower and get a positive rating.

3. Length of credit history: The longer you have an account, the better the score-keepers like it.

4. Credit mix: Credit bureau agencies likes to see a mix between credit cards, mortgages and auto loans as long as you can afford them! Don’t take out another loan in hopes it will improve your score. This category doesn’t count enough in the overall equation.

5. New credit: It’s alright to occasionally open a new account, but if you are applying for several accounts in a short period, you are a risk and your score will reflect that.

As you go through life, your credit score will fluctuate. How much it fluctuates depends on how reliable you are at repaying debt on time, especially credit cards and instalment loans. When you use credit more often, whether it’s by taking on more credit cards, getting a mortgage, taking out a student loan or auto loan, your credit score changes to reflect how you deal with the responsibility of more debt.

Factors that Impact Your Credit Score

Wondering how can I improve my credit score? Here are some factors that impact the score.

1. Late bill payments

2. High credit use

3. Multiple new loan requests

4. Short credit history

5. Limited credit types

Importance of Credit Score

Knowing what is a credit score is the first step to managing your financial life. A credit score helps decide your loan eligibility. Lenders rely on it before approving a personal loan, credit card, or even a car loan. 

A good score can help you get funds quickly, while a poor score may result in rejections or high interest rates. Many people face problems due to low scores, often without knowing why. 

That's why knowing how to build credit score and tracking it is often important. 

Role of Credit Score

Your lender first checks your score when you apply for a loan. This score tells them whether you've paid past debts on time and how much credit you currently use. If your score is high, you are more likely to get approved for loans. You might even get better interest rates and higher credit limits.

But if your score is low, lenders may reject your application or charge higher interest. Many people struggle to get loans or even a mobile connection because of this. 

What is Credit Awareness?

Credit awareness means understanding what is a credit score & how it affects borrowing. RBI has made it clear that all credit rating agencies should create credit awareness among customers. It helps avoid loan rejections while improving financial habits.

Credit Score Range

You need to know where your score falls to fully understand what is a credit score. 

1. 300-579:Lenders may reject applications or charge very high interest due to repayment risk.

2. 580-669:Loans may be approved, but the rates will likely be higher than average.

3. 670-739:Is 700 a good credit score? Well, many lenders approve loans in this range. 

4. 740-799:Is 750 a good credit score? Well, lenders see this as low-risk.

5. 800-900:It gives you access to the lowest rates and fastest approvals. It defines what is the best credit score and what is the maximum credit score.

Who Calculates Credit Scores?

Credit scores are calculated by authorised credit bureaus. These are firms that collect your credit records from banks, lenders, and financial institutions. 

In India, the main bureaus are CIBIL, Equifax, etc. When you borrow or use a credit card, these activities are reported to the bureaus. 

Components of Credit Score

To fully answer what is a credit score, it helps to know what it's made of. These are the key parts:

1. Timely repayments

2. Credit usage ratio

3. Credit history length

4. Credit product types

5. New loan applications

Benefits of a Good Credit Score

A good credit score makes life easier. You get loans faster, with better interest rates. It also increases your chances of getting a credit card or a home loan. 

Many people with strong scores get pre-approved offers without even applying. It shows lenders that you're responsible with money. With a poor score, many people face rejection even for small loans.

How to Improve Credit Score?

Look Up Your History

Negative information can lead to applications for credit being declined – check for any errors and have them corrected, find out if you are behind on accounts you may have forgotten about and get them into a payment plan or paid.

Stay On Time With Your Payments

Sounds obvious? Well, it is. Few things can tarnish a shiny credit score as quickly as a late credit card payment. As such, it is important that you make sure to pay at least your minimum payments on time every month. Missing payments on loans or credit cards could cause problems that can cost you for years. Defaults in the previous twelve months will hurt you the most. The easy solution is to pay everything by direct debit, then you'll never miss or be late. While we normally caution against only making minimum repayments on debts (as the faster you repay, the less the total interest) one technique is to set up a direct debit to just repay the minimum, purely as a vehicle to ensure you're never late. Then manually pay more each month on top of it. If you are in difficulties, the cliché "contact your lender" is a good one. Hopefully it will try to help. Changing your repayment schedule is preferable to you than defaulting – and though it will hit your credit score, it's better than a court judgment or decree against you.

Minimize Credit Applications

There are two types of inquiry on your Credit report, Soft inquiry & hard inquiry. Soft inquiry - Whenever you look up your own history online with a free tool, that is typically a “soft” inquiry that does not harm your credit, On contrast, Hard credit inquiries (meaning, requests for your credit report from lenders when you are looking for a new loan or applying for a credit card), can negatively impact your credit score in the short term. Every application you make leaves a footprint on your credit file. Too many and it might make it seem you are desperate for credit leading to companies declining your application due to the perceived increased risk.

Manage Your Credit Utilization

One of the best ways to get a handle on your credit is by working to minimize utilization of it as much as possible. Ideally, you want to aim for 30% credit use or less. Sometimes, emergencies come up that required people to use more than this. While those instances may happen, try to keep utilization under 30% during non-emergency uses.

You can control your credit utilization by:

1. Paying down revolving credit debt, focusing first on cards or lines that are close to their limit.
2. Requesting an increase in your credit line if you are a good customer with a solid payment history.
3. Paying more than once in a billing cycle; adding in a payment mid-month may lower the balance that is reported to the agencies.

Don't Withdraw Cash on Credit Cards

This is both expensive to do, as interest is higher and you're charged it even if you repay in full each month. Crucially, many lenders see it as evidence of poor money management.

Evaluate your Credit Report

Errors in the credit report have been widely reported, proving that it is a common occurrence. This is why it is important to keep a check on any possible errors in the report. Check your credit report regularly for inconsistencies. The health report will help you trace any incorrect information, delays in updating the changes and more. If you spot any errors, get them reported and rectified instantly.

Frequently Asked Questions (FAQs)

Q.1. How much credit score will be considered a good credit score?

A score above 700 is often seen as good. If you're wondering which credit score is good, this is the range where approvals are easier and interest rates are lower.

Q.2. How is credit score calculated?

Credit score depends on payment history, credit usage, types of credit, and recent activity. These are used to calculate what is a credit score.

Q.3. What is a good credit score?

A score above 750 is good. It shows lenders that you are reliable. It helps when applying for credit cards, home loans, or any loan.

Q.4. How do you get a credit score?

You get a credit score when you borrow money or use a credit card. Bureaus track this activity to build your score over time.

Q.5. Is 750 a good credit score?

Yes, 750 is a good credit score. It shows a strong credit history. You may get faster loan approvals and better interest rates from lenders.

Q.6. What is a poor credit score?

If you're asking what is a bad credit score, anything below 580 is considered poor. It can lead to rejections or very high borrowing costs.