How Is Credit Score Computed? Read On to Know.

Do you know that your credit standing, or your credit score can decide your financial future? This is a 3-digit number that can decide your chances of availing the loan, credit cards and other crucial kinds of credit. No matter whether you are placing an application for a mortgage to purchase your dream house, an auto loan to buy your first 4-wheeler, or an education loan to finance your education, your score plays an important role. So, this makes it important for you to check credit score online. Note that if you want to check credit score by PAN card, then that is also possible through online lending institutions.

However, credit score computation is a complicated procedure that considers distinct factors. Mentioned in this article are in detail how credit score gets computed in India and what measures you must take to maintain a good credit score.

Table of Contents

Credit score – what is it?

It is a 3-digit number that ranges anywhere between 300 and 900. The higher the credit score, the better the credibility of the individual. Your credit score is computed by four credit bureaus. These bureaus are crucial agencies that collect as well as maintain the data on an individual’s credit history. There are majorly four Indian credit bureaus: Equifax, CIBIL, CRIF High Mark and Experian.

The commonly used credit score here in India is the score determined by CIBIL, also called the CIBIL score. CIBIL score refers to a number that ranges anywhere between 300 and 900. A score surpassing 750 is looked upon as good while a credit score less than 550 is known as poor.

How is your score computed?

Credit scores are computed depending on your individual’s credit history, which involves info regarding your repayment behaviour and borrowings. The listed elements are looked upon while computing your credit score –

Repayment history –

This is an important parameter in deciding an individual’s credit history and score. The payment history involves info regarding the credit accounts, late or missed payments and severity of delinquencies.

Credit utilisation ratio (CUR) –

CUR (credit utilisation ratio) refers to the percentage of the overall credit limit that an individual has used. A high ratio means an individual is highly dependent on credit, which may harm the score.

Credit age –

Credit age refers to the time length that an individual has had credit accounts. The longer your credit age, the more established your credit history is. It has a considerable effect on your credit score.

A mix of credit –

A mix of credit is the distinct kinds of credit accounts held by an individual involving loans, mortgages, and credit cards. A diverse mix of credit infers the potential to impact an individual’s credit score in a positive manner.

Current credit inquiries –

This infers the number of times an individual has placed an application for credit in the past few months. Multiple inquiries in a short span can have a considerable impact on your credit score. Once the bureaus have collected all the crucial credit details, they use a complicated algorithm to review the data and compute the credit score. The method involved in computing the score may be different for distinct credit bureaus. However, factors that impact your score stay the same.

Why is your credit score crucial?

A strong score is important for individuals who are looking to avail a credit card or loan, as financial institutions use a credit score to evaluate an individual’s credibility. A high score shows that an individual is responsible financially, trustworthy and can repay debts timely. As an outcome, individuals with a high score are more likely to get credit cards and loans at a favourable rate of interest and terms and conditions.

In contrast, individuals with a low score might find it extremely challenging to get hold of a credit card and loan. Even if they are provided credit approval, they might require paying a higher rate of interest and must be subject to stringent repayment terms.

Ameliorating your score

If you hold a low score, there are various measures that can be taken up to improve it. These involve.

· Pay your dues on time

It is important for you to maintain a strong score. Any missed or payment repayment can lower your score. So, ensure to timely repay your dues and in full.

· Lower your CUR (credit utilisation ratio)

Your CUR (credit utilisation ratio) must ideally be below 30 per cent of your credit card limit. If you hold a high CUR, try, and lower it by repaying your debts.

· Review your credit report periodically

It is crucial to periodically check out your credit report to ensure all data are accurate. You must instantly dispute any inaccuracies or errors that you may find.

· Avoid placing an application for credit often

Applying for credit very often can have a negative impact on your score. Ensure to restrict your applications for credit to just when required.

Frequently asked questions linked with credit score computation –

Who computes the CIBIL score?

CIBIL stands for credit information bureau limited and is one of the important credit bureaus present in India that compute your score. The score computed by CIBIL is called the CIBIL score, and it gets updated on your report to show your financial journey.

What’s the formula for computing a credit score?

There’s no fixed formula you can use for computing a credit score. Distinct credit bureaus have distinct algorithms that are utilised for score computation. The algorithms differ from one credit bureau to another and hence, your score computation for every credit bureau will differ too.

Is your salary factored in when computing your score?

Your salary may be factored in by lenders when assessing your report to decide your credibility as a credit applicant. However, your take-home salary is not factored in for your credit score computation by any credit bureau.

How can you know if the score computation on your credit report is correct?

Regularly review your report if you figure out any error and raise a complaint instantly with the bureau for instant rectification. Post correction, your credit score will increase, which would increase your loan and credit card eligibility chances.