Understanding Credit Scores
What is a Credit Score?
Your credit score is a three-digit number (typically ranging from 300-900) that represents your creditworthiness to lenders. This numerical assessment is calculated based on your credit history and helps financial institutions determine how likely you are to repay borrowed money. In India, the four major credit bureaus - CIBIL, Experian, Equifax, and CRIF High Mark - generate these scores using similar but slightly different algorithms. A higher score indicates better credit health and increases your chances of loan approval with favorable terms.
How Credit Scores Are Calculated
Credit bureaus evaluate multiple factors to determine your score: Payment history (35% weight) is the most crucial - late payments significantly hurt your score. Credit utilization (30%) measures how much of your available credit you're using - keeping it below 30% is ideal. Credit age (15%) considers how long you've had credit accounts. Credit mix (10%) looks at different types of credit you handle. New credit inquiries (10%) track how frequently you apply for new credit - too many hard inquiries in a short period can lower your score.
- Excellent: 750+ (Best loan approval chances)
- Good: 700-749 (Favorable terms likely)
- Fair: 650-699 (May face higher interest rates)
- Poor: Below 650 (Loan approval challenges)
Building and maintaining a good credit score requires consistent financial discipline. Always pay bills and EMIs on time, keep credit card balances low, and avoid applying for multiple credit products simultaneously. Regularly monitor your credit report for errors (you're entitled to one free report annually from each bureau) and dispute any inaccuracies immediately. Remember that improving a credit score takes time - negative marks can stay on your report for up to 7 years, though their impact diminishes over time with positive credit behavior.
Frequently Asked Questions
How often should I check my credit score?
It's advisable to check your credit score at least once every 3-6 months, and definitely before applying for major loans. Regular monitoring helps you spot errors or fraudulent activity early. Many banks and financial apps now provide free monthly credit score updates. Checking your own score counts as a "soft inquiry" and doesn't affect your credit rating.
Will closing old credit cards improve my score?
Contrary to common belief, closing old credit cards can actually hurt your score by reducing your total available credit (increasing utilization ratio) and shortening your credit history length. Unless the card has high annual fees, it's often better to keep old accounts open and occasionally use them for small purchases to keep them active.
How long does it take to rebuild a poor credit score?
The recovery timeline depends on your specific situation, but with consistent positive behavior (timely payments, low balances), you can typically see significant improvement within 12-18 months. Severe issues like defaults or bankruptcies take longer (up to 7 years) to stop affecting your score. Starting with secured credit products can help rebuild credit history.
