A credit score is a measure of your reputation – your reputation as a borrower, that is. It is the numerical value that measures your creditworthiness. It indicates

• How you handle your finances,
• Your ability to pay off a debt,
• And your payment behavior.

Lenders use this information to determine if you are a high risk borrower or not. The number has become essential if you’re looking to get yourself a loan. If you are found to be very risky, lenders may have to take steps in order to protect their investment. This data is gathered from banks and other financial institutions that you have dealt with previously. Of course, at i2i Funding, it isn’t the only measure lenders look at it, but it’s still very important.

The Science Behind The Credit Score

Your credit history will affect how your credit score will turn out. Credit score is computed based on a formula that grades 5 different aspects which include:

• Payment history,
• Available credit balance in your account,
• Credit utilisation,
• Balance between your secured and unsecured loans, and
• The number of loans and credit cards you have.

The credit score looks at both the positive and negative facets of your credit data. It doesn’t matter if you’re in a lot of debt. It is still possible for you to have a high score, provided you are diligent with your payments. One might think that if you have no credit cards or accounts (i.e. no debts), you should have a high score. However, you would most likely have a low score. This is because there is no data supporting how well you can repay, thus making you a high risk borrower, thanks to ambiguity.

Credit scores are calculated by credit bureaus with the help of an algorithm. Your credit score not only helps lenders assess your loan eligibility, but also helps them understand if you are worthy of credit. The higher your credit score, the higher are your chances to get your loan approved.

Credit scores range from 300 to 900. The closer you are to 900, the greater is the chance of your loan getting sanctioned. A higher credit score indicates that the credit institution is more confident in your ability to repay the loan. As a general rule, anything above 750 is considered a good credit score. All banks usually look at the credit score as one of the many checks they do before advancing a loan.

Read about: How to get a personal loan despite a low CIBIL Score?

There are 4 credit bureaus in India authorized by RBI: 1) CIBIL 2) Experion 3) Equifax 4) High Mark Credit Information Services. The most popular of these is CIBIL. You can choose to get your credit score online from the official websites of any of these bureaus.

How is credit score calculated?

The credit score (commonly also called the CIBIL score in India) is calculated based on a number of factors, especially your payment history. In addition, your credit score is also calculated based on the following aspects:

• Your total available credit balance.
• Balance between your secured and unsecured loans.
• Number of loans and credit cards you have.
• Credit utilization.

CIBIL score rank – How Lenders see you

• 800 +: Exceptional

A credit score of 800 and above is considered exceptional. Borrowers within this range will more than likely not have any problem in getting a loan.

• 750 to 799: Very Good

Practically automatic approval along with the lowest rates on whatever you apply for including, automobile loans, credit cards and even lower insurance rates.

• 700 to 749: Good

Good chance of being approved for credit with competitive interest rates. Even though this is a pretty good credit score, there may be some lenders that offer slightly higher rates and less favorable terms than they would offer consumers with a better credit.

• 650 to 699: Fair

Good chance of being approved for credit with competitive interest rates. Even though this is a pretty good credit score, there may be some lenders that offer slightly higher rates and less favorable terms than they would offer consumers with a better credit.

• 600- 649 and blow: Poor

Scores in this range indicate serious financial problems and action needs to be taken. Lenders will deal with you with extreme caution. It will be difficult to secure unsecured personal loans and major credit. The credit cards available to you will also be very limited.

• 599 and blow: Very Bad

Scores below 599 is considered very bad. No established and credible financial institution will provide credit to person with these scores. It will be almost impossible to get any kind of loan at these scores.

Here are a few other things to know about credit scores:

1. Credit reports are different from credit scores

Sometimes these words are wrongly interchanged. Credit scores are calculated using the information on your credit reports. Credit reports contain details of your credit accounts, how often you apply for credit and debt collection accounts, among other things.

2. There are many different scores & there are different credit score ranges, too

When you’re trying to figure out where you stand in terms of improving your creditworthiness, make sure you are comparing the exact same score. Also, ensure you know the correct range to avoid any confusion. For example, a 750 score in Experian, (which is another credit bureau that measures your credit score) might not necessarily be equivalent to a 750 in CIBIL.

3. Your credit score can cost you lakhs over a lifetime

A low credit score means you’ll probably have to pay higher interest rates on things like credit card balances and loans. You can see an estimate of how much your credit will cost you using any Lifetime Cost of Debt Calculator.

What are the benefits of having a good credit score?

With a good credit score, banks provide you with benefits, such as

• Quicker loan approval process,
• Low interest rates,
• Higher loan amounts, and
• Longer repayment periods.

In case you have a low credit score, you can improve your credit score if you follow these steps:

• Making payments for your loan installments on time.
• Maintaining a balance between secured and unsecured loans.
• Reducing the number of loans you borrow in a particular year.
• Ensuring your debt-to-income ratio is low.

Different kinds of negative information will remain on your credit report for different periods of time, but generally, negative information ages off your report and no longer affects your score usually after a period of 7 years.

A credit score isn’t the only thing lenders consider when reviewing applicants. If you have a poor credit score, you still might be able to secure a loan through an alternative lender. Alternative loan sources such as P2P Lending platforms like i2ifunding.com grade borrowers on a whole lot of other factors (using a risk score from A to F) before approving their loans. The factors studied include your ability to pay, location, job history and more. It’s a more comprehensive process, which is why P2P Lending seems to be taking off in India!