A credit score is a 3-digit number that predicts how likely someone is to repay their debts on time. It’s calculated using a mathematical formula that analyzes a person’s credit history, which includes information such as repayment history, total credit balance, number of loans and credit cards, credit utilization, and more.
Financial institutions use credit scores to make decisions about lending money, offering credit, and other financial services. For example, if you go to a bank to request a personal or home loan, the bank will first check your credit report. If you have a good credit history, they are more likely to approve your loan.
Credit Score vs. Credit Report: What's the Difference?
A credit report is a detailed record prepared by credit bureaus based on several factors, primarily including repayment history, credit utilization ratio, credit account age, total number of credit accounts, and hard inquiries. Each bureau uses this information to calculate a score out of 900, which becomes your credit score.
In essence, a credit score is an overview of your financial health, while a credit report is like a detailed map, or "financial kundali," of your credit history.
How many credit bureaus are there in India, and which one is most important?
Currently, four credit bureaus operate in India: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. All four are regulated by the RBI. Credit scores from different bureaus can vary for the same individual. For example, my CIBIL score is 803 as of today, but my Experian score is currently 847.
In India, financial institutions primarily check an individual's CIBIL score before offering a credit product, making CIBIL the most prominent and important credit bureau. However, the other bureaus are also significant and should not be overlooked.
Why are credit scores and credit reports important?
Factors that affect credit score:
What is a Hard Enquiry (Hard Pull) and a Soft Enquiry (Soft Pull)? Does Checking Your Credit Score Affect Your Score?
When you apply for a credit account, the issuer makes a hard inquiry (or hard pull) on your credit report, which can negatively impact your credit score. However, when you check your credit score yourself—whether on the bureau’s website or through a third-party partner of the bureau—it’s considered a soft inquiry. Soft inquiries do not impact your credit score or report in any way. So You can check your credit report as many times as you like, and it will not affect your score.
Pro Tips for Users Who Want to Improve & Manage a Strong Credit Score:
If you’re aiming to improve and maintain a strong credit score, you can follow some advanced strategies. However, for most people, it’s usually enough to stick to the basics—just pay on time, and your credit score will improve over time. But if you want to put in a little extra effort, here are two tips:
Building and maintaining a good credit score requires consistency, patience, and responsible financial behavior. By focusing on the basics—making timely payments, managing credit utilization, and monitoring your credit report—you’re already setting yourself up for success. The advanced tips we discussed can give you an extra edge, but they aren’t necessary for everyone.
The key is to maintain a healthy credit profile by avoiding unnecessary debt, managing your spending, and regularly reviewing your credit report. Your credit score reflects your financial habits, and by following these strategies, you can keep it strong, opening doors to better financial opportunities in the future.
Financial institutions use credit scores to make decisions about lending money, offering credit, and other financial services. For example, if you go to a bank to request a personal or home loan, the bank will first check your credit report. If you have a good credit history, they are more likely to approve your loan.
Credit Score vs. Credit Report: What's the Difference?
A credit report is a detailed record prepared by credit bureaus based on several factors, primarily including repayment history, credit utilization ratio, credit account age, total number of credit accounts, and hard inquiries. Each bureau uses this information to calculate a score out of 900, which becomes your credit score.
In essence, a credit score is an overview of your financial health, while a credit report is like a detailed map, or "financial kundali," of your credit history.
How many credit bureaus are there in India, and which one is most important?
Currently, four credit bureaus operate in India: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. All four are regulated by the RBI. Credit scores from different bureaus can vary for the same individual. For example, my CIBIL score is 803 as of today, but my Experian score is currently 847.
In India, financial institutions primarily check an individual's CIBIL score before offering a credit product, making CIBIL the most prominent and important credit bureau. However, the other bureaus are also significant and should not be overlooked.
Why are credit scores and credit reports important?
- Whenever you apply for a credit product, such as a personal loan, home loan, or credit card, the issuer will check your credit score and credit report first. If they find any issues in your report, they may not offer you their product.
- People with good credit scores can secure better deals from banks. For example, if Person A and Person B visit SBI to ask for a Rs. 30L home loan, and Person A has a CIBIL score of 730 while Person B has a CIBIL score of 800, SBI will offer a loan with a lower interest rate to Person B due to their better credit score. On the other hand, Person A will likely receive the loan at a higher interest rate.
- If you have a good credit score, you can negotiate a lower interest rate with the bank. Banks prefer offering loans to individuals with good credit scores and reports, so you'll be in a stronger position if your credit score is high.
- Some insurance companies offer discounts on health and life insurance policy premiums based on credit scores. For example, when I recently ported my parent's health insurance policy to ICICI Lombard, I received a Rs. 3,700 discount simply because I have a very good CIBIL score.
Factors that affect credit score:
- Repayment History: This is one of the main factors in your credit report. The more you pay on time, the better your credit score will be. It's as simple as that.
- Credit Utilization Ratio (CUR): This is the percentage of your credit usage compared to your total credit limit. Let me simplify it for you: If your total credit limit is Rs. 30,00,000 and you’ve spent Rs. 90,000 in a month, your Credit Utilization Ratio (CUR) would be {(90,000/30,00,000) x 100} = 3%. Consider this the second most important factor for your credit score. The lower your CUR, the better for your credit report. Always try to keep your utilization as low as possible.
- Credit Account Age: The length of time you’ve had credit accounts is also an important factor for your credit score. Older credit accounts positively impact your credit report, which is why we always try to keep our oldest credit accounts active.
- Credit Mix: Having a mix of credit products can positively affect your credit score. Credit products can be secured (e.g., home loans, credit card against FD) or unsecured (e.g., credit cards). Having a combination of both can be beneficial.
- Number of Enquiries: When you apply for a credit product, the issuer performs a hard inquiry (or hard pull) on your credit report. Multiple hard inquiries in a short period can negatively affect your credit score.
- Always pay your EMIs and credit card dues on time. Even a single late payment can damage your credit score. If you have multiple credit cards or loans, it’s advisable to set up auto-payment for these. This way, if you forget to pay a bill or loan EMI on time, it will be paid automatically, preventing late payments. Having more credit cards can help here. For example, if you have 20 credit cards, 20 on-time payments will be recorded on your credit report every month, even if you don’t use all of them. Just make sure there are no late payments. On the other hand, if you have only one credit card, only one on-time payment will be recorded. The more on-time payments, the faster your credit score will improve.
- Keep your credit utilization under 30%. I always advise people to keep their utilization ratio as low as possible. Personally, I keep my utilization under 1%. To maintain a low utilization ratio, you can get more credit cards or request credit limit increases on existing cards. This will increase your total available credit, which in turn lowers your CUR.
- Having active old credit accounts is crucial for building a good credit report. Always try to get a credit card with low annual fees or even a lifetime-free card at the beginning. Don’t close the account unless it’s causing an issue for you. Don’t worry too much about this factor; with time, your credit account age will increase, and this will automatically improve your credit score.
- A mix of secured and unsecured credit accounts can be beneficial. However, this is not a very significant factor for your credit score. If you don’t need a secured credit account, such as a car or home loan, don’t force yourself to get one just for the sake of improving your credit score.
- New credit inquiries can negatively affect your credit score. Every time you apply for a new credit account, the bank conducts a hard inquiry on your credit report. Multiple hard inquiries in a short period can significantly decrease your credit score. However, this also depends on other factors. If you have a long credit history, a low CUR, and a high number of on-time payments, this factor won’t affect your score much.
At the beginning of your credit journey, avoid applying for too many credit products within a short time. In my opinion, you should not apply for more than three credit products over a six-month period.
What is a Hard Enquiry (Hard Pull) and a Soft Enquiry (Soft Pull)? Does Checking Your Credit Score Affect Your Score?
When you apply for a credit account, the issuer makes a hard inquiry (or hard pull) on your credit report, which can negatively impact your credit score. However, when you check your credit score yourself—whether on the bureau’s website or through a third-party partner of the bureau—it’s considered a soft inquiry. Soft inquiries do not impact your credit score or report in any way. So You can check your credit report as many times as you like, and it will not affect your score.
Pro Tips for Users Who Want to Improve & Manage a Strong Credit Score:
If you’re aiming to improve and maintain a strong credit score, you can follow some advanced strategies. However, for most people, it’s usually enough to stick to the basics—just pay on time, and your credit score will improve over time. But if you want to put in a little extra effort, here are two tips:
- Get More Lifetime Free Credit Cards: As I mentioned earlier, the more credit cards you have, the more on-time payments will be recorded. Some credit card issuers may not generate a statement if you don’t use the card within the statement period. To overcome this, you can simply make a small payment, like Rs. 10, on each credit card you don’t actively use. When you have a credit balance on your card, the bank is required to generate a statement, even without other usage.
- Keep Your Outstanding Balances at 0 on Reporting Dates: Banks report customers’ credit card usage data to credit bureaus on specific dates, which might be the end of the month or your billing date. You can find this reporting date in your CIBIL report, or check the guide available on TF Community. Try to maintain a zero or very low current outstanding balance on each credit card on the reporting date. This will lower your overall credit utilization ratio, which positively impacts your credit score.
Building and maintaining a good credit score requires consistency, patience, and responsible financial behavior. By focusing on the basics—making timely payments, managing credit utilization, and monitoring your credit report—you’re already setting yourself up for success. The advanced tips we discussed can give you an extra edge, but they aren’t necessary for everyone.
The key is to maintain a healthy credit profile by avoiding unnecessary debt, managing your spending, and regularly reviewing your credit report. Your credit score reflects your financial habits, and by following these strategies, you can keep it strong, opening doors to better financial opportunities in the future.
