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All about Credit Scores

A credit score is a rating assigned to an individual on the basis of their credit report. The credit report is a summary of the debt held by an individual, the amount of credit that he or she may have availed in the form of loans or credit cards, the repayment history of the individual, the defaults on any payments, the number of credit applications made to different banks or NBFCs, and the utilisation of credit limits.

A bad credit score can be a stumbling block for individuals who are applying for loans from banks or other financial institutions. Lending institutions check the credit score and credit rating of individuals while assessing their loan applications. Low credit scores result in an automatically rejected application. Hence, it is important to either have a good credit rating, or to improve the individual’s credit rating before applying for loans.

Credit Bureaus

The main credit rating bureaus in India are CIBIL, Experian India, Equifax India, and CRIF High Mark. On the basis of the individual’s credit repayment history, these bureaus rate them on different scales. For example, CIBIL uses a risk index score of 1 to 5 and 300 to 900 (300 being the lowest). The fees to access credit scores vary depending on the offerings. For example, CIBIL provides a report and credit score for around Rs. 470, while Equifax provides the same for Rs. 400. Experian provides only a credit report for Rs. 138. Highmark also provides the credit report(s) on individual basis. All of these bureaus provide a variety of credit-related services suited to different customer requirements. CIBIL, which began operations in August 2000 and is the oldest, has the largest market share in India as of now.

Table 1: CIBIL Score 2.0 Ratings

Risk Score & Risk Index Interpretation of what this score reflects
NA or NH The individual has no credit history, or individual has a credit history that has not been reported in the last 2 years.
1-5 A Risk Index is provided, since the individual has a credit history which is less than 6 months. (Higher the index, lower the risk.)
300-900 The individual has a credit history of more than 6 months in the last 2 years. (Higher the credit score, lower the risk.)

Source : https://www.cibil.com/faq/credit-score-and-loan-basics

The table above shows the revised CIBIL Score 2.0 ratings. The ratings from 300 to 750 are considered bad CIBIL scores, while scores of 750 and above are considered as good healthy scores by banks and NBFCs. Good credit scores can lead to benefits such as longer repayments periods, quicker approval of loans, lower interest rates, and higher loan amounts.

Improving the individual’s credit score to take advantage of these may take time, but is not difficult. According to CIBIL, maintaining a good credit history by following a few simple steps can improve the credit score radically.

How can you find out your credit score?

The catch with making a credit report inquiry is that we often assume that asking a question will automatically bring down your credit score. In reality, there are two kinds of inquiries— a hard inquiry, and a soft one.

A hard inquiry is usually carried out by banks, governments, and financial institutions in order to check your credit worthiness before making a lending decision. In case of unfavourable results, your credit score may take a hit— and remain on your credit report for around 2 years. But with good financial habits, this damage will fade over time.

A hard inquiry takes place when you apply for a credit card, a loan for any purpose, a mortgage on your house, and so on.

A soft inquiry takes place when the results will not be taken into account for a financial decisions. If you check your own credit score, or for the purposes of a background check (pre-approved cards, employment, etc.), your credit score may be checked but it can have no significant impact. This is called a soft enquiry.

Now with online tools, it is much easier to find out your credit score without negatively impacting the report. Just enter your contact information and personal details into Paisa credit report tool, to get a free credit report. And the best part it, we conduct a soft inquiry to help you be well prepared for the future.

How to Apply for Credit Score Online

For an online application to access your credit report, follow these steps:

1. Complete the form, with all necessary details of your identity

2. Pay the fees via online banking or card (if applicable). In case you are using the free Paisa tool, this step does not apply.

3. Answer authentication questions if needed, to prove your identity

4. You may be asked to provide soft copies of relevant documents.

If you follow this procedure, the credit bureau will sent the report via password-protected email (if they have instant credit report service). Conversely, it may be sent to your registered address via courier within approximately 1 week.

We recommend that you check on your credit report at least once a year to prevent any unpleasant surprises. Also, it is necessary to ensure there are no errors in the details contained in the reports, because a number of authorities—such as your employer, or the government—will use it for validation. Here are the details contained in your credit report, besides the credit score:

  • Name, DOB and Pan number
  • List of all the places where you have resided
  • List of all the places where you have worked
  • The current status of active bank accounts
  • History of previous hard inquiries into credit history
  • Additional identification such as driving license, voter’s ID card, etc.

Steps to improve your credit score

1. Paying dues on time

Pay all your credit card bills and utility bills on time, as lending institutions look negatively on late payments of dues. Also, if you are the co-signatory or guarantor on a loan or credit card, you are assumed to be equally liable for missed payments. This could affect your ability to access credit when you need it. So ensure that the first signatory or the individual you are guarantor for, is paying their loans on time.

2. Keep your Credit balances in check

Do not utilise too much credit. Control your credit utilisation and the number of credit cards you have. Having too many credit cards can be viewed negatively.

3. Apply for new credit in moderation

Be prudent and cautious while applying for new credit. The number of enquires by lenders against your credit report is also recorded by the credit bureaus. Applying for too many credit cards or loans can be viewed negatively.

4. Maintain a healthy mix of secured and unsecured credit

Maintain a good mix of secured and unsecured loans. Secured loans such as home loans or vehicle loans which are taken against collateral have a positive effect on your credit score, as opposed to unsecured loans such as personal loans or credit cards. Taking of too many unsecured loans can be viewed negatively.

5. Review you credit history

From time to time, purchase your CIR from CIBIL, Experian India, Equifax India, or CRIF HighMark. Ensure that all your credit score is positive, and up to date. If you have a negative score, take steps to ensure that your score is improved.

Following these simple steps can improve your credit score and ensure that you gain access to better credit facilities and benefits. Access the credit bureaus, get your credit report, and improve your credit score!


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July 2024