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What Is a Credit Score? Definition, Factors, and Ways to Raise It

A credit score is a quantitative indicator of a person's creditworthiness. Lenders use it to determine the risk involved in making a loan. Continue reading to learn more.

  • 5,144 Views | Updated on: May 20, 2024

An individual’s creditworthiness is represented numerically by their credit score. It is used by lenders, creditors, and financial institutions to assess the risk of lending money or extending credit to an individual.

Key takeaways

  • A credit score is a number used to represent your credit history and current financial standing. It ranges from 300 to 850.
  • The higher your credit score, the more likely you will receive favorable interest rates and loan terms from lenders.
  • A good credit score determines your eligibility for loans and mortgages and the interest rates you will receive.
  • Individuals with better credit scores can get higher coverage and easy issuance.

A good credit score can make obtaining loans, credit cards, or mortgages with favorable terms and interest rates easier for an individual.

What is a Good Credit Score?

A credit score is a number that ranges from 300 to 850 and is used to represent your credit history and current financial standing. The higher your credit score, the more likely you will receive favorable interest rates and loan terms from lenders. On the other hand, a low credit score can impact your ability to obtain credit and lead to higher interest rates, making it more expensive to borrow money.

Your score is based on the information in your credit report, which is a comprehensive credit history record. Your credit report includes information on your accounts, such as credit cards, loans, and mortgages, as well as payment history and outstanding balances.

How to Check Your Credit Score?

As a consumer, you must regularly check your CIBIL score to ensure sound financial health. Your credit score plays a significant role in determining your financial future, including the ability to secure loans, credit cards, and even rental applications.

Step 1: Obtain a Free Credit Report

The first step to checking your credit score is to obtain a free credit report from one of the three major credit bureaus: Equifax, Experian, and TransUnion. By law, you are entitled to one free credit report per year from each credit bureau. You can obtain this report through the official website AnnualCreditReport.com.

Step 2: Review Your Credit Report

Once you have received your credit report, reviewing it thoroughly for any inaccuracies or errors is essential. Look for discrepancies in personal information, such as your name, address, or social security number, and any incorrect information about your credit history, such as missed payments or inaccurate account balances. As soon as you discover any inaccuracies, notify the credit bureau.

Your credit report will not include your actual credit score. You can obtain your score for a fee from the credit bureaus or a third-party credit monitoring service. Alternatively, many credit card companies now offer free credit scores to their customers. Remember that your score may vary slightly between the bureaus, so checking all three is essential.

Step 3: Analyze Your Credit Score

Once you have your credit score, it is essential to understand what it means. A score of 720 or higher is considered excellent, while a score of 660 to 719 is considered good. A score of 620 to 659 is considered fair, while a score of 600 to 619 is considered poor. If your score is lower than 600, it’s important to take action to improve it.

Credit Score Range

What it Implies

720 or higher

Excellent

660-719

Good

620-659

Fair

600-619

Poor

Below 600

Very Poor

Step 4: Improve Your Credit Score

If your CIBIL score is low, there are several steps you can take to improve it. Pay your bills on time, pay down your debt, and limit new credit applications. You can also dispute any inaccuracies on your credit report, significantly impacting your score.

Does Credit Score Affect Your Life Insurance Purchase?

While a few insurance companies may review your credit report, most rely on credit scores to assess creditworthiness. A credit score is a number depicting the overall health of your credit profile at a specific moment. Insurance companies and organizations developing credit scoring models consider various factors to calculate credit scores.

Typically, individuals with higher CIBIL scores are considered more financially responsible. The primary factors commonly considered include major negative items such as bankruptcy, collections, foreclosures, liens, and charge-offs, as well as past payment history, including the number and frequency of late payments and the duration between the due date and actual payment date.

Does Credit Score Affect Your Life Insurance Premium?

While your credit may not directly affect the life insurance premium you need to pay, it certainly can be one factor affecting your overall insurance experience. When you apply for an insurance cover, the insurance company will check your financial background, and credit score is one of the ways of checking your financial health. Insurance agency uses your credit score to judge your HLV (Human Life Value) and decide your credibility.

If your credit score is strong, it shows the company that you are financially fit and gives them a better picture of your income. This reduces paperwork because if the issuing insurance firm finds the credit score satisfying, they will not ask for income-proof evidence, and purchasing life cover gets easier.

Individuals with better credit scores can get higher coverage and easy issuance.

Importance of a Good CIBIL Score

One crucial aspect that significantly influences your financial journey is your CIBIL score; a good CIBIL score is just what you need to end your worries. The importance of a good CIBIL score cannot be overstated, as it greatly influences an individual’s ability to secure credit and achieve financial goals. So, why is it important? Find out now.

Loan Approval and Interest Rates

A good CIBIL score significantly increases your chances of loan approval. Lenders view individuals with high credit scores as responsible borrowers, reducing the perceived risk of default. Moreover, a good CIBIL score can help you qualify for loans at lower interest rates, potentially saving you a significant amount of money over the life of the loan.

Credit Card Approvals

Credit card issuers rely on CIBIL scores when evaluating applications. A high CIBIL score enhances your chances of getting approved for a credit card with attractive features and benefits. Additionally, it may result in higher credit limits, providing you with greater financial flexibility.

Negotiating Power

A good CIBIL score gives you negotiating power when dealing with lenders. With a strong credit profile, you are in a better position to negotiate favorable terms and conditions for loans and credit cards. This can include lower interest rates, reduced fees, and more flexible repayment terms.

Insurance Premiums

Some insurance companies use credit scores to assess the risk of insuring an individual. A good CIBIL score may lead to lower insurance premiums for life insurance policies. A higher credit score is often associated with lower perceived risk.

Employment Opportunities

In some industries, employers may check the credit history of potential employees as part of the hiring process. While not universal, a good credit score can positively influence employers’ perceptions of your financial responsibility and trustworthiness.

Building a Positive Financial Profile

Maintaining a good CIBIL score is crucial for building a positive financial profile. Responsible financial behavior, reflected in a high credit score, opens doors to better financial opportunities and can pave the way for achieving your long-term financial goals.

Factors Determining CIBIL Score

Let us quickly discuss the key factors contributing to your CIBIL score and understand how each element influences your creditworthiness.

Payment History (35%)

The most significant factor impacting your CIBIL score is your payment history. Lenders want to ensure you are a reliable borrower who promptly repay debts. Late payments, defaults, and settled accounts negatively affect this aspect of your credit score. Timely payments, on the other hand, contribute positively, showcasing your financial responsibility.

Credit Utilization (30%)

Credit utilization refers to the ratio of your current credit card balances to your credit limits. Keeping this ratio low is crucial for a healthy CIBIL score. A lower credit utilization ratio suggests that you are not overly reliant on credit, which lenders view positively.

Length of Credit History (15%)

The length of your credit history is another determinant of your CIBIL score. Generally, a more extended credit history provides more data for assessing your creditworthiness. Lenders are more comfortable extending credit to individuals with a well-established and positive credit history.

Types of Credit in Use (10%)

Diversity in the types of credit you use also influences your CIBIL score. A mix of secured and unsecured credit, such as credit cards, loans, and mortgages, can positively impact your score. It indicates that you can handle various types of credit responsibly.

New Credit Accounts and Inquiries (10%)

Opening multiple new credit accounts quickly can be perceived as risky behavior. Additionally, each hard inquiry made by lenders when you apply for credit can slightly impact your score. It is advisable to space out credit applications and be cautious about opening new accounts frequently.

Outstanding Balances and Debt (10%)

The total amount of debt you owe, including credit cards, loans, and other forms of credit, affects your CIBIL score. A high level of outstanding debt can be a red flag for lenders, signaling potential financial strain. Managing and reducing outstanding balances is crucial to maintaining a healthy credit profile.

Reasons for Low CIBIL Credit Score

A higher credit score indicates a lower credit risk, making it easier for you to secure loans and credit cards at favorable terms. However, not everyone enjoys a stellar credit score. Understanding why a low CIBIL score is crucial for individuals looking to improve their financial health and access better credit opportunities.

Late Payments

One of the primary factors affecting your credit score is the timeliness of your payments. Late payments on credit cards, loans, or other financial obligations can significantly impact your CIBIL score. Lenders view consistent and timely payments as a positive indicator of financial responsibility.

High Credit Utilization

Maintaining a high balance on your credit cards relative to your credit limit can negatively impact your credit score. This is known as high credit utilization. Lenders perceive this as an increased risk, as it may suggest financial instability or an overreliance on credit.

Defaulting on Loans

Defaulting on a loan severely blows your credit score. When you fail to repay a loan as agreed, it signals to lenders that you may not be a reliable borrower. This can have long-term consequences on your ability to secure credit in the future.

Frequent Credit Inquiries

Each time you apply for credit, a hard inquiry is made on your credit report. Multiple inquiries within a short period can be perceived as a sign of financial distress or an attempt to take on too much credit at once. Such actions can lower your credit score.

Limited Credit History

Individuals with a limited credit history may have lower CIBIL scores. Lenders prefer borrowers with a proven track record of responsible credit usage. If you are new to credit or have only recently started building your credit history, your score may be lower.

Credit Mix and Diversity

A diverse credit portfolio that includes a mix of credit cards, instalment loans, and other credit accounts is viewed positively by credit bureaus. Having only one type of credit may limit your score.

Financial Setbacks

Unforeseen financial setbacks such as job loss, medical emergencies, or other unexpected expenses can lead to missed payments and increased credit utilization. These events can have a lasting impact on your credit score.

Settlements and Bankruptcy

Opting for debt settlements or declaring bankruptcy can harm your credit score. While these options may provide short-term relief, they have long-term consequences on your creditworthiness.

Errors on Credit Report

Mistakes on your credit report, such as inaccurate information about late payments or accounts that do not belong to you, can adversely affect your credit score. Regularly checking your credit report for errors is essential in maintaining a healthy credit score.

What to do if Your Credit Score is Low?

If you find yourself with a low credit score, do not panic. There are practical steps you can take to improve your creditworthiness and set yourself on the path to financial success.

Check Your Credit Report

Start by obtaining a copy of your CIBIL credit report from major credit bureaus such as Equifax, Experian, and TransUnion. Review the report for inaccuracies, unauthorized accounts, or any other discrepancies dragging down your score. Dispute any errors you find to ensure your credit report accurately reflects your financial history.

Understand Your Credit Score

Familiarize yourself with the factors contributing to your credit score. The two most important components are payment history and credit utilization. Late payments, defaults, and high credit card balances can significantly impact your score. Understanding these factors will help you prioritize areas that need improvement.

Create a Budget

Take control of your finances by creating a realistic budget. Analyze your income and expenses, identifying areas where you can cut back. Allocating funds responsibly and avoiding unnecessary debt will positively impact your credit score.

Pay Bills on Time

Your payment history is crucial in determining your CIBIL score. Consistently paying bills on time will have a positive impact. Set up automatic payments or reminders to ensure you never miss a due date.

Reduce Credit Card Balances

High credit card balances relative to your credit limit can harm your credit score. Aim to reduce outstanding balances and keep your credit utilization below 30%. This demonstrates responsible credit management and can lead to a higher credit score.

Diversify Your Credit Mix

A diverse mix of credit types, such as credit cards, instalment loans, and mortgages, can positively impact your credit score. However, avoid opening multiple new accounts at once, as this can have a negative effect.

Become an Authorized User

If you have a trusted family member or friend with a good credit history, consider becoming an authorized user on their credit card. This can help improve your credit score by incorporating their positive credit behavior into your history.

Be Patient and Persistent

Improving your credit score is a gradual process. Be patient and stay committed to your financial goals. Consistent, positive financial habits will lead to long-term improvements in your creditworthiness.

Will Checking Your CIBIL Report Repeatedly Hamper Your Score?

Checking your credit report, also known as a “soft inquiry” or “soft pull,” does not impact your credit score. Soft inquiries occur when you review your credit reports, potential employers conduct background checks, or when lenders perform pre-approved credit checks. These inquiries are harmless and do not affect credit scores because they are initiated by the consumer for informational purposes.

However, it is crucial to distinguish soft inquiries from “hard inquiries” or “hard pulls.” Hard inquiries occur when lenders review your credit report as part of a credit application process, such as when applying for a credit card or loan. Unlike soft inquiries, hard inquiries can have a minimal and temporary impact on your credit score, usually lowering it by a few points. The impact is short-lived, and the score typically rebounds within a few months.

Difference Between CIBIL Report & CIBIL Score

Regarding managing your financial health, two crucial elements are significant: the CIBIL report and the CIBIL score. Both are essential tools for lenders to evaluate your creditworthiness, but they serve different purposes and provide distinct information.

Feature

CIBIL Report

CIBIL Score

Definition

A detailed record of your credit history, including credit accounts, repayment behavior, outstanding debts, and any defaults or late payments.

A numeric representation of your creditworthiness, ranging from 300 to 900, based on your credit history and financial behavior. A higher score indicates better creditworthiness.

Components

Comprehensive information about your credit accounts, loan details, credit card usage, and any negative remarks such as defaults or late payments.

Solely a numerical representation derived from the information in your credit report. It does not provide a detailed breakdown of your credit history.

Purpose

Provides a detailed overview of your credit history and financial behavior, helping lenders assess your creditworthiness comprehensively.

Serves as a quick reference point for lenders to gauge your creditworthiness without delving into the details of your credit report.

Frequency of Updates

Typically updated every month to reflect changes in your credit accounts, new loans, and repayment behavior.

Dynamic and can change in real-time based on your financial activities and transactions. Lenders may request the latest score when assessing your credit application.

Accessibility

Can be requested by individuals from credit bureaus, and one free report per year is mandated by the RBI.

Accessible to individuals through credit bureaus and various financial institutions. Some credit cards and financial platforms also provide free access to your CIBIL score.

Importance for Lenders

Offers a detailed insight into your creditworthiness, enabling lenders to make informed decisions about your loan or credit card application.

Provides a quick snapshot of your creditworthiness, facilitating faster decision-making for lenders.

How to Read Your CIBIL Report?

Understanding how to read your CIBIL report is essential for maintaining good financial health and ensuring access to credit when needed.

Review Personal Information

Ensure your personal details, including name, address, and contact information, are accurate. Any errors should be reported to CIBIL for correction.

Check Employment Information

Verify the accuracy of your employment details. Employment stability can positively impact your creditworthiness.

Examine Account Information

Check the status of each account (e.g., open, closed, settled) and review payment histories. Timely payments contribute significantly to a positive credit score.

Understand Credit Score Factors

Familiarize yourself with the factors influencing your credit score. Pay attention to areas where improvement is needed, such as reducing credit card balances or addressing overdue payments.

Monitor Credit Utilization

Evaluate your credit utilization ratio, which is the percentage of your available credit currently using. Keeping this ratio low can positively impact your credit score.

Address Discrepancies

If you identify any inaccuracies or discrepancies in your CIBIL report, promptly contact CIBIL to rectify the errors. Resolving issues promptly is crucial for maintaining a healthy credit profile.

How do Insurance Companies Use Your Credit Scores?

Insurance companies utilize credit information as part of their underwriting process, which involves assessing whether to issue a new policy or renew an existing one and determining the appropriate insurance premium. Most insurance companies consider credit information to calculate the insurance rate. In addition to credit scores, insurers consider other traditional rating factors such as financial credit records and claims history.

How Can Insurance Help Improve Credit Scores?

Insurance is essential to financial planning and stability but can also positively impact your credit score. A good credit score determines your eligibility for loans and mortgages and the interest rates you’ll receive. Here are five ways insurance can help improve your credit score.

Demonstrating Financial Responsibility

Insuring your assets, such as your home, car, or other valuable possessions, shows that you are responsible and take your financial obligations seriously. This is because insurance companies typically require you to pay premiums on time, and a history of timely payments is a positive signal to credit bureaus.

Payment History

Consistently paying your insurance premiums on time will improve your payment history, a significant component of your credit score. Late payments, however, can damage your credit score, so it is crucial to ensure you pay your premiums on time.

Credit Utilization

Your credit utilization ratio, the amount of credit you use compared to your credit limit, also significantly determines your credit score. Some insurance policies allow you to pay your premiums every month, which can help you avoid over-utilizing your credit card or loan, thereby improving your credit utilization ratio.

Credit Mix

A mix of different types of credit, such as installment loans, credit cards, and insurance policies, can also improve your credit score. This is because it shows that you can handle various types of credit responsibly, demonstrating your financial stability and ability to manage debt.

Length Of Credit History

The length of your CIBIL history also affects your credit score, so taking out insurance policies and keeping them active for an extended period can improve your credit history and, in turn, your credit score.

Wrapping up

A regular credit score check is crucial to an individual’s financial health and stability. Understanding what it is and how it is calculated can help individuals take the necessary steps to improve their credit scores and secure their financial future. By paying insurance premiums on time and protecting their assets, individuals can demonstrate their ability to manage their finances responsibly to lenders and creditors.

FAQs

1

What is a good CIBIL score?

A good CIBIL score typically falls within the range of 750 to 900. A higher score indicates a healthier credit profile and increases the likelihood of loan approval at favorable terms.

2

What is CIBIL credit report?

A CIBIL credit report is a detailed record of an individual’s credit history and financial behavior. It includes credit accounts, payment history, outstanding debts, and credit inquiries. Lenders use this report to assess creditworthiness when considering loan or credit card applications.

3

What are the factors that positively affect your CIBIL score?

Factors that positively affect your CIBIL score include timely payment of credit card bills and loan EMIs, maintaining a balanced mix of secured and unsecured credit, a longer and positive credit history, and low credit utilization ratio.

4

What are the factors that negatively affect your CIBIL score?

Factors that negatively affect your CIBIL score include late or missed payments, high credit card balances, frequent credit inquiries, a short credit history, and defaults on loans or credit accounts.

5

Why is a PAN card required for checking the CIBIL credit score?

A PAN (Permanent Account Number) card is required to verify the identity of the individual checking their CIBIL credit score. It helps prevent fraudulent attempts to access someone else’s credit information.

6

Is there a limit to the number of requests for accessing CIBIL credit score?

There is no specific limit on checking your own CIBIL credit score. Individuals can access their credit report as often as needed without impacting their credit score. However, frequent credit inquiries from lenders may negatively affect the score.

7

How do CIBIL credit scores change?

CIBIL credit scores change based on various factors, including payment history, credit utilization, length of credit history, new credit accounts, and types of credit in use. Regular, timely payments and responsible credit management can improve score, while late payments and increased debt may result in a lower score.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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