Why Your Credit Score Is Important For Your Financial Future

Why Your Credit Score Is Important For Your Financial Future


  1. Being credit aware is essential to have a good credit score, experts say
  2. Over 80% of Indian population doesn't know about credit bureaus: survey
  3. Five factors, including credit history, impact one's credit score
Though credit bureaus have been functioning in India for almost a decade and half, a survey shows that more than 80 per cent of the Indian population does not know about the existence of credit bureaus while a miniscule part of it understands their credit reports. Awareness about credit report utility is also low. Being credit aware is a necessity to have a good credit score, which in turn is paramount if one wants to have access to borrowing through the organised sector. Apart from this, being credit healthy ensures that one is financially healthy too and is not overleveraged. In some aspects, it could impact job prospects too. So if you want to know whether you are credit aware, just go through the following questions:

Do You Know What Credit Score Is?

Some of you may have heard about credit score, which is also known as CIBIL score (generally), but do you know what it is. Credit score is a three digit number ranging on a scale of 300 to 900. This number is calculated by considering various factors related to loans, credit cards and the repayment history of an individual. This is a statistical tool that analyses historical data related to debt and provides a rating or score based on that.

Is Credit Score Same As Credit Report?

While credit score is a three digit number, a credit report (Credit Information Report or CIR) is a comprehensive document that has information other than credit score and loans. The credit report carries personal/professional/contact information, full details about all loans and their type, status of a loan and its asset classification, enquiries status, how old the debt is and so on. Though only information listed under the accounts information head is used to calculate credit rating, the rest of the information also comes in handy when assessing a prospective applicant.

Why Is Credit Score Important?

Do you know that if you were to go to any lender for a loan, the first thing that they will do is access your CIR. If your credit report is more than or equal to the threshold level that is acceptable to them, only then you go to next level, otherwise your application is rejected outright. A CIR helps the lender assess the risk potential a prospective borrower poses if he/she is sanctioned a loan. Generally, a score of more than 750 is acceptable for sanctioning a loan and almost 90 per cent of the loans that are sanctioned are for applicants who have a score of more than 700, though different lenders may have different acceptance levels.

Is Credit Score Useful Only For Sanctioning Of A Loan?

The utility of a credit score goes beyond acceptance of loan application. A good score could help you save money by getting you good deals on loan interest rates, waiver of certain fees by the lender and, of course, faster loan processing. A credit score is also an indicator of the overall financial health of an individual. In some cases, a credit score could also come in handy when applying for a job, especially higher management and finance sector jobs.

What Impacts Credit Rating?

There are basically five factors that impact an individual's credit score. The first is repayment history. It is the most important factor and has a 35 per cent share in credit score calculation. The next is credit utilization ratio, which has a 30 per cent weightage. The other three factors are: loan tenure, which contributes 15 per cent to the score, loan enquiries and credit mix (secured and unsecured loans ratio), each contributing 10 per cent to the rating.

Has Income Level Got Anything To Do With Credit Score?

The credit score has no relation whatsoever with the income level of an individual. A credit rating is only based only on the treatment of debt, however small or large it may be. If one makes small, regular transactions on a credit card, which are paid regularly and timely, it can lead to a healthy credit score. How much one earns will not impact the credit rating.

Is CIBIL The Only Rating Agency?

Though CIBIL is the oldest and most well-known rating agency, it is not the only one. There are three other agencies that rate individuals; these are Experian, Equifax and CRIF Highmark.

Does No Credit Translate To A High Credit Score?

No, it does not! The idea of a credit rating is to assess how a person is likely to treat his/her debt in future based on historical data. So, a 'no credit' trail means no credit score; generally, an NA or NH is given to such an individual. This means that either the person has no credit history or it is not old enough to be rated.

Hopefully the points given above will let you assess if you are aware and if so, how much aware you are about credit rating, its calculation and its importance.

Disclaimer: All information in this article has been provided by and NDTV Profit is not responsible for the accuracy and completeness of the same.

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