What is a credit score? What is the importance of it? How is it determined? For knowing the use of anything, these questions are a must ask! A credit score is the three digit number valuing from 300 – 900 where 300 is considered as the lowest score and 900 is considered as highest. There are different credit bureaus who offer this score to you. Transunion CIBIL, Experian, Equifax and CRIF Highmark are the credit bureaus that offer the score. A credit score is determined by 5 factors.
1. Payment History: How consistent and responsible is the individual in paying the credits they have taken determines the payment history. Credits are either the loans that are taken from the financial institutions or the credit cards which are active. Payment history takes upto 35% in any credit score
2. The amount owed: Amount owed is the total amount that has been taken as credit from the banks or the NBFCs. This is the second major factor that comprises of a credit score. It usually has 30% weightage.
3. Length of credit history: How long have been the active accounts of the credit? Is the next factor that in the making of a credit score. The longer the duration, more will be the score. They usually advise the individuals, not to close the older accounts of the credit cards especially even when there are defaults so as to keep up the score intact and not letting it slip to a Low CIBIL Score. It takes upto 15% of overall weightage.
4. Credit Mix: A balanced mix of anything is important. There are 4 types of credits, 2 in 2 pairs. Fixed and Recurring line of credit. A secured and Unsecured line of credit. Loans are the fixed line of credit where the EMI amount or the repayment amount is the same. Credit cards on the other side are revolving line of credit where the amount used, is repaid and one can again use that amount. The secured type of credit is a home loan or a motor loan or a secured credit card where there is some security against the credit taken. Usual credit cards, personal loans are the examples of the unsecured line of credit where the credit which is given by the lender do not have security. A good credit mix is required to have a healthy score and that takes upto 10% of the score.
5. New Accounts: Opening a new account always adds the value to the score. However, there must not be multiple credit accounts that are enquired or opened in a very short span of time giving the impression that the borrower is in instant need of a lot of cash stating it as credit hungry behavior. This is 10% of the score.
Now, all these five parameters are considered by the bureaus from the information they get from the financial institutes. All the bureaus have their individual algorithm that calculates the score. And some may vary by 5% gap over each parameter balancing it! One has to make sure the score is always maintained at or above a 750 line. Then getting the approval for credits and with the lowest possible interest rates would be offered be offered. When the score is below 600, the borrower has to then go and apply for Loans For Low CIBIL Score.
There are major chances of loan getting rejected at such score. But, what can one do to not let the loan get rejected? The major thing that can be done is to let the lender know the genuine reason for the low score. Make them understand where you must have gone wrong in order to keep let them know that you are in a realization of your mistake and you will not repeat it. Give them the detailed analysis that you will not be making the same mistakes again as you have become more responsible and now the income sources have also increased compared to the last credit that was taken.
The calculation of debt burden ratio can also be explained to the lenders along with the graph of have you planned to repay the loan. If the efforts are genuine and the lender feels that you may not be as irresponsible like last time, in spite of Low CIBIL score, the loan rejection will be avoided!