Creditors and credit scores are loyal friends – they look up to each other.
6:05 pm
22.July.2020
Dear dreamer,
We trust you all are having a fine time by yourself, and we also hope that the series of chapters on financial well-being is adding value to your life. Well, unlike the last chapter on emergency which looks for the future, this chapter on credit scores will analyse your past. But, do no be intimated, past is past at the end of the day, and things can be changed for better. Now it’s a good time to add to credit scores to your vocabulary in the financial spectrum.
Credit Score: The concept
A credit score is a numeric description of a person’s creditworthiness. It is used by potential lenders to know how responsible a person by analyzing their credit history. Lenders can lawfully ask your credit reports to evaluate the risk factor in lending to someone. Credit scores typically range from 300 to 850. Higher credit scores correlate with better creditworthiness and vice versa.
What is a Credit Score made up of?
The calculation of the credit score is based on the mathematical concept of weights. It consists of five components, each with an assigned weight:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- How many types of credit in use: 10%
- Account inquiries: 10%
All the above pointers must be kept in mind when dealing with finances; lenders widely use credit scores to measure an individual’s creditworthiness.
What is a Credit Score made up of?
The calculation of the credit score is based on the mathematical concept of weights. It consists of five components, each with an assigned weight:
- Payment history: 35%
- Credit exposure: 30%
- Age of credit: 15%
- Type of credit: 10%
- Credit inquiries: 10%
All the above pointers must be kept in mind when dealing with finances; lenders widely use credit scores to measure an individual’s creditworthiness.
What score is a Good Score?
A total of four credit bureaus, licensed by the Reserve Bank of India, exists in India at present. The algorithm to calculate credit scores is different for each credit bureau, but all of them do consider the above five factors as a constant. Banks and NBFC generally observe a difference of around 50-60 points in the credit score. Yet the basic guidelines remain the same, the lenders themselves decide how to the score concretely.
For say:
Below 599: Bad
600 – 649: Poor
650 – 699: Fair
700 – 749: Average – very good
760 – 850: Excellent
Access your report
Once each year at AnnualCreditReport.com, you can legally request a free print of your credit report from each of the four major credit bureaus or the credit reporting agencies – Equifax®, Experian®, CRIF Highmark, and TransUnion®.
Way to a Better Credit Score
Responsibility is the name of the game when coming to credit scores. Thus first things first, it’s crucial to use credit responsibly. Good credit history and credit score can work wonders when buying your dream house, purchasing a car, or paying for university. Proactively maintaining your credit scores is an excellent way to keep your finances in check, reach a state of financial well-being, and ultimately achieve your goals.
This series ends here. We wish you a great financial journey ahead.