Credit scores usually range between 300 and 900. This three-digit number helps determine the credit-worthiness of a person in case they want to apply for a loan. Credit organisations like banks, non-banking financial organisations, credit card companies consider the credit score to ensure that giving credit or sanctioning a loan to an individual would not lead to bad debt.
The credit score is a numerical representation of the financial habits of a person. Timely repayment of previous loans, adhering to credit limits and other practices add points to the credit score. This score is maintained by four credit bureaus. These are government-sanctioned organisations that gather and compile financial information of individuals and calculate a credit score.
What factors determine a good credit score?
- Pay off credit card bills without delay
- If there is an unpaid loan, pay off EMIs at timely intervals as decided according to loan terms and conditions.
- Keep credit utilization limit less than 30% of the credit limit issued by the credit card company.
- Keep a periodic check on the credit score report issued by any of the credit bureaus.
- Avoid making too many credit inquiries when applying for a loan.
What do credit scores say about the credit behaviour of a person?
- A score of 800 and above is considered to be the best score.
- A score of 740 to 799 is considered ‘very good’ and 670 – 739 is considered a ‘good’ score.
- 580 to 669 is a ‘fair’ score
- Anything below 580 is considered a poor score in terms of approving a loan or giving out credit. People with these scores are considered high-risk borrowers.
- Individuals with credit scores of more than 670 are considered low-risk borrowers. Loan applications are easily accepted under this condition.
- A credit score with 580 to 669 is considered a sub-prime borrower score.
Although the scores provide a criterion on the range of the most effective credit score, it is important to understand that different credit situations will determine different factors. There is no magic credit score that will guarantee or cancel a loan.
Factors like the income of a person, the purpose of the loan, amount requested also will be considered along with the credit score report. Even with low credit scores, individuals can avail of a loan. Processing of some loan offers can be completely credit score free. What credit scores essentially determine is the term and conditions that will be sanctioned for the loan like interest rate, repayment period, etc. In current times, different scoring models are used to calculate a credit score especially when it comes to online loans or credit apps. Credit scores can also vary between different credit bureaus and it depends on the financial organisation or a credit company whether one or multiple scores will be considered.
Individuals are entitled to receive a free credit score report every 12 months from any of the credit bureaus on registering with them. These reports are also available from any of the online credit websites. The most important factor is to be aware of your credit practices and credit scores. When considering a loan, it is always beneficial to be aware of all aspects of your finances.