What is Credit Score – Everything you need to know
When you wanted to get a new credit card or when you applying for the loan, the enquiry officer first asks you is your PAN number. Most of the times the person asks your PAN number for one primary reason. He will be checking your credit risk profile. He will be accessing this by requesting your risk profile from the central credit rating agencies. These centralized agencies maintain individuals credit worthiness in terms of a numerical score. This score indicated your risk profile and this is called your credit score. In this article, we will be discussing What is Credit score and how it is important.
The credit score is an important thing in the personal finance of an individual. It affects you in many fashions like when wanted to take a loan from a back, or you wanted a new credit card or you are signing as a surety person for friends or other’s loan.
It is a measure of an individual Credit risk profile. It is metric banks and other financial institutions use to identify the amount of risk involved in lending to that particular person. The score generally represents the financial habits of the person and how stable the person is financially and what is the probability of difficultness from the individual.
There are in total 4 Central rating agencies in India. They are
A credit score is used by the banks and other financial institutions to understand the risk that is involved in lending money to the person. If the credit score is very low, then the risk involved with the person is high and hence there is a high chance of defaulters. Hence the bank in order to take that risk wanted to have good rewards for the bank in terms of high-interest rates. Hence Banks charge high-interest rates from the persons with a low score.
If the credit score is very good, then the risk involved is less and hence the chance of defaulters is less. Hence the banks wanted to have such customers who have a low chance of defaulting and hence provide low-interest rates for such individuals.
The below images gives you an idea about the credit score. the scale on which the score is calculated is different for different rating agencies. You can check the scale on the Rating agency website.
How is it measured
There is a different criterion of measurement for different rating agencies. Each has its own method of calculating the credit score developed continuously to accurately identify the risk profile of the individual. But few things that are considered in the calculation of the score are common among all the rating agencies. Those are mentioned below
- Continuous and on-time payments of EMI or credit card bills and any loan amounts.
- Credit Utilization: how much percentage of your total credit is used. If a large amount is used, it is theoretically assumed that you are having fewer finances in the bank and hence using the credit from the card for payments and hence affects the score negatively.
- Credit Mix: what is the type of credit accounts you are holding, like Loan account, Credit card accounts.
If you wanted to get your credit score report, you can visit the credit rating agencies website and access it by using your PAN card and other authentication details. As per RBI, every individual can access the credit score free once in every financial year. But if you wanted to access it more than one time, the rating agencies may charge you some amount.
You can also use the services such as ETMoney, CRED and other apps to check your credit score for free.
Tips to Increase your Credit Score
- Pay all your EMI’s, Loan amounts, and Credit card bills on time without any delays.
- Hold mixed accounts rather than having a single account like only having a credit card.
- Never spend until your credit limit is over. Spend as less as possible and don’t spend more than 50-60 per cent of credit.
- Always check your credit score and if you found any mistakes, report them immediately.
- Don’t close your credit cards all at once or don’t aggressively open new credit card accounts. This will affect your credit score.
- Don’t be a co-guarantor for other person’s loan who normally defaults payments. It affects your score as well when he defaults a payment.
How Agencies know about your financial habits
You might be thinking about how the central agencies will know about your financial spending’s and how they know when you default payment. Usually, the banks and the financial institutions must share the financial details of its customers who are using services such as Credit cards, Loan account and any other debt services.
Usually when you don’t have any such service from any financial institution and you only have a savings bank account. In that case, you won’t have a score in the agencies and they won’t be able to assign you a score and you are considered an unknow risk profile person. Only when you open your first credit card or open your first loan account, for the first time your credit score will be started and will continue to be calculated based on the new data received from the financial institutions.
keep frequently checking your score and always act accordingly to maintain the score. In this uncertain times, we never know when we will need credit and when you need such credit in the form of a loan, you can avail at the best interest possible because of your very good Risk profile score. Hence keep checking and maintain a good profile.