How credit score is calculated?

A credit score is a number used by the banking system to determine your ability to lend money. This score will be used for any lending-related banking transaction. Based on your score banks will decide on various parameters like interest rate, Credit limit, and several other Loan criteria.

CIBIL score is officially used in India to calculate your credit score. CIBIL score ranges from 300-900. 300 being poor and 900 being the best score. You can find your CIBIL score for free using this website. CIBIL score is generated by TransUnion CIBIL credit bureau.

To lend money from any valid financial institution, you should have a decent credit score above 700. If your credit score is below 700, it very unlikely that you will not get your loans from any financial institution. Better CIBIL score can make your lendings easier and also it will cheaper. A better interest rate will be charged if your credit score is higher.

Does everyone need a good CIBIL Score?
No, everyone does not need to have a good credit score. If you want to lend money to buy a car, Home, Business then you should have a good credit score. If not, do not worry about your credit score. More than 80% of them buy Homes with the help of banks, more than 50% of them buy cars by financing. So it is always better to have better credit scores.

CIBIL Score Range:
750 – 900
This shows that you have great credit history.
It is easier for you to get a home , personal loan, credit cards with a credit score within this range.
It also means that you have good payment history in the past.
650 – 750
If you have a credit score within this range, you have a good credit history.
If might not have more lending history in the past or you might be repaid with 1-2 delays. It might be difficult to get loans at best rate possible with this score.

300- 650
If you this credit score, you cannot get lendings from banks easily.

You might get lending at very high interest rate.

These are the factors used for calculating credit scores:
Payment History :
The most important parameter for affecting or boosting credit score is your payment history. Credit score will take a serious hit if you miss your payment dues. A credit score reflects on your good payment too. Longer credit history will help the lenders better and that will also reflect in your credit score. When you miss a couple of payments or applied for bankruptcy in the past, your credit history will be really poor and no major corporations will lend you money with good plans. Repaying bills for several years only can help in improving your scores. You need at least 5 years of good repayments if you made financial mistakes in the past.

Duration of Credit history:
If you have managed the credit better for several years, it will be a major boost in your credit scores. A longer duration means that you have managed your finance better for a longer duration. This will help financial corporations ready to lend you better interest rates with better plans. If you are young, this possibility is not the case. If you have no previous financial credit history, you will be judged based on your current spending habits and salary.

Amount Lending:
In general, you should not lend more than 30-40% of your salary to pay bills. If you lend more money means it may lead to a cash crunch in case of any financial changes in your current world. This is also an important parameter in credit score. If you already have loans that need repayment of about 30-40% of your current salary, you cannot take more loans since it will be tough for you to pay more than 30-40% of your salary due to other expenses. If you take more loans anyways, that means your credit score may take a dip. The second loan will lend with more interest rate as this lending has more risk comparing your initial lending.

Repayment structure:
Repaying loans or credit card bills earlier can boost your credit scores. This shows that you have more credit comparing to your lending. If you have repaid quickly, you will be eligible for more lending or you might get lending for a cheaper rate. In case of repaying delays more than twice, this means that managing finance poorly causing a dip in your credit score. This dip leads to lesser credit or higher interest rates.

How credit score calculated when you have no credit history?
The credit score will be between 600-700 if you don’t have a credit history. The lending will be decided based on your current salary and your ability to pay back from your salary. Only 30-40% of your monthly income will be the maximum threshold EMI amount for your loans. If you insist to get more loan amount may cost you more interest rate. To improve your credit history in the beginning, get a credit card and spend money using your card. Then pay the amount properly within the deadlines to improve your score quickly. 6-9 months usage will sufficient to improve your score to 750+, which can help you in lending at cheaper rates

How to improve your Credit score?
Paying bills for several years will help in improving your scores. You need at least 5 years of good repayments if you made financial mistakes in the past. If you don’t have any credit history, then do not worry about the credit scores.

Frequently Asked Question:

  1. Why bank needs credit scores?
    To find a valid candidate to lend the money collected from the depositor. The bank works as a middle agent getting money from the depositor and lend to the lender by taking some commission (2-15%). Credit score will determine whether they have the correct candidate for lending expecting the full return of principal along with interest.

2. Why I need a good credit score?
To get money from a financial institution. In the financial market, you can lend money at the interest of 0.5-2% per month. Outside of the financial institution, money lending can be done at 3-5% interest per month with more risk.

3. Is Will getting more credit cards to reduce credit score?
No, several credit cards do not affect your credit score. Your usage of a credit card determines the credit score. More credit compared to your earning can lead to a decrease in credit scores.

4. Will my past financial transaction affect my credit score?
It will affect if you have poor financial history.

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