Most of us have come across the term credit score, at least once in our life. However, there are so many questions related to credit score or credit reports that remain unanswered. Here are few answers to the popularly asked questions.
What is a credit score?
Whenever you want to borrow money, or open a credit card account or any other form of credit, you are asking someone to trust you that you will repay the amount. However, lenders won’t be able to call up every person or institution you’ve borrowed money from. Which is why they would check your credit score.
In simple words, if your entire financial life could be summed into one number, it would be your credit score. It is a 3-digit numeric expression which represents your history of borrowing money and paying back. Therefore higher the credit score, the more you are trustworthy for the lenders.
Even though it might sound amusing that the entire history of borrowings is narrowed down to a number, creditors take the number very seriously. A poor score could lead you to pay sky-high interest rates on credit cards and loans, that too only if they get approved. On the other hand, if having a good credit score could give you high possibilities of loan approval and lowest interest rates.
What are the different credit score ranges?
The credit score ranges from 300 to 900. The closer the score is to 900, the more confident the credit institution is on your ability to repay the loan. Anything above 750 is considered a good score.
If you have an average score of 600- 750, then lenders will feel risky to give you approval on loan or credit card.
What are credit bureaus?
A credit bureau is an organization that collects all credit-related information of individuals and provide them to creditors in the form of a credit report.
There are 4 major credit bureaus in India:
- CIBIL
- Experian
- Equifax
- High Mark
What is the difference between a credit report and credit score?
Even though a credit report and score are closely related, they are quite different. The credit bureaus collect all the financial information and compile it in your credit report. The report detail all the personal information including your name and address, as well as all your credit accounts that are open, closed or settled. It is always recommended to check your free credit report online.
Using the information in your credit report, credit bureaus calculate your score which is then shared with banks, lenders and other organizations. Since there are 4 different credit bureaus, you have more than one credit report and credit score.
How are credit scores calculated?
The details surrounding how the scores are calculated remains a mystery, as each agency’s algorithm is different. However, here are few parameters that are used:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit accounts (15%)
- Credit mix (15%)
- New Credit ( 10%)
A credit score is necessary to be checked on a regular basis in order to keep your finances in check.
