June 25,2019

Before we speak about Credit Scores being bad or good, first let us understand the first and foremost thing:  WHAT IS CREDIT? A Credit is a financial help extended by any bank of financial institution against a borrower’s income and his repayment capacity. Credit extended by any financial institution is in the form of Loan or your credit Card. The credit limit on your credit card acts as your loan whereas a loan is fairly evident from its meaning. There are two types of Credit given by any bank or financial institution: Secured Credit usually given by taking any movable or immovable asset as security and Unsecured Credit which is given without any security cover. Home Loan, Auto Loan, Gold Loan, Loan against Property are examples of Secured Credit and Personal Loan, Education Loan and Credit Card are examples of Unsecured Credit. Loans are fixed type of credit as the loan taken gets over after payment of fixed instalments (Monthly or Quarterly) and credit Cards are revolving types of Credit where the limit extended is restored after the payment is fully made with interest.

What is a Credit Score?

Since we have explained what exactly Credit is, let us now see what is a Credit Score? A Credit Score is a score usually assigned to an individual whenever he borrows from any financial institution. A credit score is a three-digit number between 300-900. It is established by five parameters: Payment History, Amount Owed, Length of Credit, Credit Mix and New Credit. With individual parameter and the weight age given by different credit bureaus makes a credit score. Credit score, detailed information about all the credit and the credit inquiries made, credits applied for with the personal detail of the individual makes a credit report.  Each time you take a loan; the record of your loan is collated and maintained by Agencies particularly created for doing this work. The records of your loans are generally provided by the lenders themselves. These agencies are usually known as Bureaus and your Bureau score is generally known as Credit Score. The most popular Bureau in India is CIBIL and our credit score is normally referred as CIBIL score instead of credit score as for many years that was the only bureau that helped with the credit score and credit report of any individual. There are other bureaus present such as Experian, Equifax and others.

What is exactly a CIBIL Score and what factors affect your CIBIL Score?

The definition of a Credit Score is explained above and the same applies for CIBIL score also. Any score between 750 and 900 is Good CIBIL score, anything between 600-750 is an average credit score and anything below 600 is a bad credit score. With the five parameters explained above; any CIBIL score is bifurcated like this. However whenever you borrow beyond your means then you normally skip your monthly repayments and this will affect your credit score. Obviously, a bad credit will face difficulties when the borrower would want to apply for new credit as that shows the low creditworthiness on an individual and makes it a risk profile for a financial institute to approve the credit for.

In today’s times, instant gratification or the need to possess something instantly is the name of the game. Hence individuals now borrow for indulging in any product which they wants from consumer durables to personal need based loans and also for their business by taking a Loan against property or business loans,. So whenever you borrow beyond your means; you are bound to default on your payments to the bank and if this occurs regularly then your CIBIL score or Credit Score gets affected and goes down. Consequently you don’t get a loan whenever you want borrow next time since a BAD CREDIT SCORE will put off the bank to give any more money as you have not paid your previous monthly instalments on time.

How to change your BAD Credit score to GOOD credit score?

One must follow the basic rules:

  • Always make all your payments on time. Never think of missing your credit card outstanding or your personal loan EMI for the month thinking that one missed payment isn’t going to make any difference.
  • It, there are any backdate dues yet to be cleared, one should make it a habit to get clear the old dues as soon as you can.
  • Is you have an old bank account from where any monthly instalments would have got cleared; please don’t close that account. Older the account better is the impact and your chance to improve your score.
  • Applying for a new credit every now and then is a good way to get your score up.
  • Applying for too many loans and at the same time may just get you a huge dip in your score. So, that always has to be taken care for as it would be considered a credit hungry behaviour.
  • Credit utilization ratio for the credit cards should be considered as 30%-35%, and hence the credit card should not be utilized for more than that of its total limit.

These are the easiest and major points to be taken care of while changing your BAD CREDIT SCORE to a GOOD CREDIT SCORE and not let a borrower fall in bad credit which can make it difficult for him/her to deal later.

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