Today, credit or CIBIL scores are often asked for before considering any financial product. They are a part of our everyday conversation. However, you need to understand what they mean and their calculation. Let us better understand credit scores, the variables affecting them, and their calculation.
What are credit scores?
You should do a CIBIL score check as it signifies your creditworthiness. The score demonstrates your capacity to repay the borrowed amount to lenders. A three-digit CIBIL Score typically ranges from 300 to 900. A score of 680 or more is regarded as good.
Variables that determine credit scores
Credit information departments consider the following elements to calculate credit scores:
Credit history
A person's credit history shows whether they can repay debts, which is essential when applying for a Loan. It involves your account number, credit usage, and any missed or late payments.
Credit score inquiries
Such inquiries involve details like the Loan you want to apply for, the amount you can apply for, and whether you are doing it individually or jointly.
Repayment history
This includes information on your timely repayment and missed payments. These factors help you arrive at the desired credit score.
How are credit scores determined?
The major credit information bureaus use different methods to validate your credit scores. However, here is how to check the CIBIL score:
- Your payment history accounts for 35% of your score. It reveals how consistently you have paid your bills, how frequently you missed payments, and how many days over the due date you paid them. So, you can get a good score if you have a higher percentage of on-time payments.
- Around 30% of your credit score depends on how much money you owe on Credit Cards and Loans. Your Credit Score would be better if you have a large balance and have used all your Credit Card's limit. At the same time, low balances and on-time payments boost the score.
- The duration of your credit history determines 15% of your credit score. You undoubtedly have a higher credit score if you have a long account of on-time payments.
- The number of goods you have and the categories of products account for 10% of your credit score. Your credit score boosts through Loan instalments, Credit Cards, and more.
- The remaining 10% depends on your most recent credit activity. Details like opening multiple accounts, your repayment history, the Loans you apply for, and the credit limit used up are considered.