Monday, 21 May 2018

4 Top Factors To Calculate Your Credit Score

Posted by RaviKumar Nama
(Published on 22-May-2018)

Irrespective of the type of loan you apply for, a good credit score is important. Lenders check your credit score and report before approving your loan application. However, do you know how your credit score is calculated? Do you know How Does it Impact Your Loan Borrowing?

Understanding credit score

TransUnion Credit Information Bureau (India) Limited (CIBIL) is the primary agency that calculates your credit score. It uses advanced analytical methods to assign a score from 300 to 900. A credit score closer to 900 makes it simpler to avail of quick loans at a competitive rate of interest. Although every financial institution has a different credit score cut-off, most lenders are willing to lend money if your score exceeds 750. However, a high credit score does not guarantee the approval of your online loan application because lenders consider several other factors while sanctioning your loan.

Calculating credit score

CIBIL considers multiple factors to calculate your credit score. Here are four such factors.

1. Credit history

The credit history holds 30% weight-age in the calculation of your score. Banks and non-banking financial companies (NBFCs) provide your personal and credit-related details to the credit bureau. The bureau then collates the information on the report provided to them by financial institutions. CIBIL maintains monthly records for the last three years towards your bills and Equated Monthly Installments (EMIs). 

The credit report includes the status of all your accounts stating whether these are written-off, settled, or still outstanding. In case there are any delays, it records the number of days passed since the due date. Therefore, if you have defaulted or delayed a payment, it negatively affects your credit score.

2. Credit mix

 The CIBIL score depends on the components of your loans, which means the amount of secured versus unsecured facilities. The credit mix holds a 25% weightage in your overall score.

Any delay or default irrespective of whether it is a secured or an unsecured instant loanhas an adverse impact on your score. However, if you have a higher weightage of unsecured loans, it reduces your score even if you have made timely payments. On the other hand, timely repayment of secured loans positively affects your credit score.

3. Credit utilization

The credit utilization percent is how much money you have borrowed against how much you may actually be eligible to borrow. Credit utilization also holds a weightage of 25% in the total credit score.

Credit utilization requires your credit limit and the amount you have actually borrowed. A higher utilization over a period is negatively perceived by the credit bureau because it reflects that your burden is increasing over the duration.

4. Others

The number of loans you have applied for during the recent past holds 20% weightage in your total credit score. This is reflected in the Enquiry portion of the report. If you have made several enquiries, it is negatively seen by the credit bureau.

The credit report not only impacts on your ability to avail of easy loans but also impacts its terms and conditions. If you have a higher score, there is a higher possibility of approval with favorable terms. It is recommended you check your score before applying for an offline or an online loan to reduce the chances of rejection due to a lower score.

Disclaimer:

This data is for Academic purpose only. The data published on this post is just my opinion based on my own research and analysis and is provided as a general market commentary. As it does not take into account of your personal circumstances, please do not invest based solely on this information. By Viewing any material or using the information within this post you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general information provided here.

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