Whenever you give a thought to applying for a credit option, may it be a credit card or loan, your credit score is the initial parameter that banks or NBFCs check. Well, the major question is, what a credit score is, and why is it important for the banks or NBFCs to check my CIBIL score before approval. Another important question asked by many is how to increase CIBIL score fast if it is low. Here, we aim at providing an answer to such questions.
A credit score is one of the important parameters taken into consideration by the financial institution to judge your credibility. Due to this, it becomes highly important for you to keep a close watch on your credit score to improve it as soon as possible so that you can avail your desired credit card or loan.
A credit score in India is a 3-digit number ranging between 300 and 900 that shows the holder’s credit history, score, repayment behaviour etc., in a numerical manner. Credit score gets generated based on numerous factors like pending loans, past transaction history, credit repayment etc. Knowing such parameters beforehand helps financial institutions to decide your creditworthiness, and accordingly, they know whether you are eligible for the credit option.
Crucial points to note about credit score:
- Credit score in India is a 3-digit numerical representation of your credit score ranging anywhere between 300 and 900.
- Score closer to 900 is looked as good wherein your score equals 750 and above.
- To avail of the desired credit option at a lower rate of interest, it is crucial for you to strictly maintain a good credit history.
- Lenders, financial institutions, banks and others keep a close look at your credit history to decide your eligibility chances.
- Even though there exist various other factors that also are taken into consideration when approving your loan or credit card application, credit score holds the highest weightage.
What is known as an excellent credit score?
A credit score in India is a numerical summary of your creditworthiness that ranges between 300 and 900. Higher your score, the better it is. Here are details about your credit score values.
|Credit score||Health of credit score|
|300-549||Poor credit score
Reveals irregular repayment habit
High dependency on credit
High risk of turning into defaulters
|550-649||Fair credit score
Irregular repayment behaviour
|650-749||Acceptable credit score
Responsible repayment habit
Error-free credit history
Lesser risk for becoming a defaulter in future
Expected to avail lower interest rate on a loan
May be eligible for loan and credit card
|750-900||Good credit score
Responsible repayment routine
No default payment
A lesser rate of interest may be available
High negotiation potential
Error-free credit history
Why must you have a strong credit score?
Here are some of the primary benefits or advantages of having a strong credit score:
∙ Low rate of interest
Having a good credit score makes you qualify for a low rate of interest on loans making it slightly easier for you to repay your EMI with zero trouble. Thus, it is always advisable to check your credit score before you apply for any loan or credit card to ensure your eligibility. In case your credit score is less or below 750, work towards it to improve it.
∙ Instant credit card and loan approval
An excellent credit score proves your credibility of being a good applicant who may repay the outstanding dues timely. Applicants with a lower score are either eligible for credit option approval or are given the approval at a higher rate of interest to make up for the higher risk involved in lending them. However, remember that even after your credit score is good, there is zero sure shot guarantee of availing approval as financial institutions also factor in other crucial parameters. But having a poor credit score endows a sure shot chance of credit application rejection. Thus, having a good credit score is the key.
∙ Enhanced negotiation power
A credit score, which is close to 900, is often looked upon as good as it endows you with the power of negotiation for better terms and conditions in the form of a lower rate of interest and minimal or no processing charges for the loan.
∙ Higher approval amount
Based upon your credit score, income & other parameters, financial institutions determine your loan amount to be offered to you. Having a good credit score also makes the financial institution believe that you hold high credibility as an outcome; they may approve your need for a higher amount. However, in case an applicant with a low credit score asks for higher loan proceeds, financial institutions may approve your loan at a relatively higher rate of interest.
∙ Higher eligibility for credit card approval
An excellent credit score also makes you eligible to avail your desired credit card. Opting for a credit card of your choice, i.e., a card of the category wherein you make the most spending, help you lower your overall transaction cost by offering rewards points, higher discounts, cash backs and other offers.
What are the important factors that impact your credit score?
There are numerous factors that impact your credit score. However, these factors, if rectified, can provide a positive outcome. Here are 2 major factors:
∙ Repayment history
Your payment history shows how sincere you are when making your payments for a credit card or loan EMIs. Any delayed payments have a direct impact on your score. As financial institutions offer the most priority to your credit score before approving your credit application, thus it is pivotal to maintain a good score.
∙ credit utilization ratio (CUR)
CUR is the amount utilized out of the overall credit amount provided by the bank. Spending around 30 percent of your overall credit amount is looked at as apt by the bureaus. However, expenditures made over this limit lower your credit score. This is because spending over this set limit gets you projected as a credit hungry individual who lacks the creditworthiness for future credit owing to the risk of default attached.