If you have ever considered taking a loan, then you would have definitely come across the idea of a credit score. A credit score is a metric that a lender uses to estimate the probability of a borrower repaying a loan on time. In that it signifies your dependability as a borrower. Having a high or a low credit score will play an important part in determining your ability to secure a loan successfully, at your desired interest rate. 

How is a credit score determined?

Your credit score is determined by a credit bureau, licensed by the RBI – TransUnion CIBIL, Equifax, Experian or CRIF Highmark. There are four key parts of the process they use that you need to be aware of.

1. Your track record: The first thing that affects your credit score is your repayment history. This is the most obvious sign of credibility for lenders – what is the state of previous or current loans, and the efficiency of your planning in meeting deadlines. 

2. Credit utilisation ratio: Your credit utilisation ratio (CUR) is the percentage of your limit that you spend every month. As far as possible try to keep this number to 30% or below, as anything higher can negatively impact your credit score. Always remember to clear your debts on time as well.

3. Sustainability of credit lines: The longer you are able to sustain your credit lines, the better your credit score. If you have been able to maintain the same credit card over a long period of time, by making timely payments and not having it cancelled, it portrays dependability. 

4. When credit inquiries are made about you: On the other hand, time can also play against you, if the number of inquiries made about your credit score increases over a prolonged period. Each of these inquiries can affect your score marginally, as a pattern of frequenting debt becomes evident. 

What does your credit score determine?

Credit scores can be anywhere in between 300 and 900. Let’s look at what it means to have a high or low credit score.

1. Having a high credits score: The closer your score is to 900, the better your chances of procuring a loan at the desired rate of interest. When you have a higher credit score, lenders are reassured of your ability to efficiently repay the loans. Maintaining a score of 750 or higher increases your chances of getting a loan or credit card approval. Ensuring that your credit score remains on the higher end is especially important before applying for a home loan. 

2. Having a low credits score: Generally, as many lenders make risk based assessments to set the interest rate, a low credit score can cause you to incur a higher rate of interest. At the same time, simply getting approved for credit or a loan can also become more difficult, as you become seen more as a liability and are likely to default. There are still ways you can get credit. Add co-applicants/guarantors with high credit score to increase the chances of getting a loan. Can also look for loan against securities like gold then lenders would give less importance to credit scores.

Your credit score emphasises your trustworthiness as a borrower. The higher your credit score, the better your chances of getting approved for a loan or a line of credit at a reasonable rate of interest. When it comes to improving your credit score to maximise your opportunities, always remember to work with an experienced financial planner, who will know what to do and the most optimal way to get it done.