Credit Score becomes very important when you are willing to apply for a loan from any financial institution. Credit Score refers to a 3-digit number ranging between 300 and 900. Your Credit Score indicates your financial credibility. Higher the score, better it is. Your Credit Score will not only tells whether you can avail a loan, but it will also strongly influence the terms and conditions on your availing the loan.
It is the job of the credit bureaus to calculate the credit score of the individuals. According to guidelines issued to all the financial institutions in India by the Reserve Bank of India (RBI), every financial institution is required to send financial data of an individual to credit bureaus every month.
There are 4 credit bureaus in India. These credit bureaus are as follows:
The credit bureaus acquire that financial data of the induviduals which is useful for the calculation of their credit scores/ credit reports.
These credit bureaus use a similar method for calculating the credit score and hence the credit score calculated by all of them has the same significance.
On the basis of the information received by the credit bureaus regarding your credit history (loan, credit card, etc.) and the payment habits (timely payment, delayed payment, pre-payment, etc.), your credit score is calculated.
(1) Credit History
As per RBI's guidelines, banks & other financial institutions send the credit related data to the credit bureaus every month. Based on these data, credit bureaus calculate your credit score. Your Credit History has 30% weightage in the calculation of credit score, which is the highest weightage.
(2) Credit Utilization
Your Credit Utilization has 25% weightage in the calculation of credit score. Credit Utilization is arrived at by dividing your outstanding loan by your credit limit. Lower the Credit Utilization, better it is for you.
(3) Duration of Credit
For how long you are taking any loan, is also an important factor while calculating your credit score.
(4) Types of Credit
Whether your are availing Secured Loan (home loan or vehicle loan) or Unsecured Loan (personal loan or credit card), is an important factor in the calculation of your credit score. Higher weight of unsecured loan may lower down your score. While Secured Loan, if paid in time, will definitely have a positive impact on highering your credit score.
Types of Credit together with Duration of Credit has a weightage of 25% in your credit score calculation.
(5) New credit
You should be aware that each time you apply for a new credit card or new loan, can impact your credit score negatively from the point of view of the lender, as a sudden increase in the number of credit/ credit cards is assumed as an increased debt burden, which may hamper your score. It has a weightage of 10% in your credit score calculation.
(6) Other Determinants
Other factors such as recent credit behavior, number of accounts, negative status account, how many credit applications you have made in the recent past, entries for credit inquiries, etc. together make up a weightage of 10% in your credit score calculation.