What is a Credit Score & why is it important?
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What is a Credit Score?
A credit score is a three-digit number assigned by a Credit Information Companies (CIC) to a borrower based on his or her track record WRT earlier and existing loans and borrowings.
TransUnion CIBIL, Equifax, Experian and High Mark Credit Information Services are the four well known CICs operating in India. These agencies employ statistical tools to award you a credit score and also evaluate your creditworthiness. Credit score for individuals is between 300 to 900. The credit score is categorized as Bad, Poor, Average, Good and Excellent. While each lender has its own criteria for using the score, a score below 600 is considered Bad, that between 600 and 649 is considered Poor and a score between 650 to 699 is considered Average. Most banks consider a score between 700 to 749 to be a Good score, while a 750+ score is considered Excellent.
The Higher, The Better
A credit score of 700+ increases your chances of availing a loan at preferential terms.
What Does the Credit Score Depend On?
A credit score typically depends on your total outstanding debt, repayment history, loan tenor, the frequency of availing credit and the type of loan accounts active. Hence, even by paying off the current debts you stand a chance of improving your credit score. The importance of achieving a good credit score is stated below:
- Preferential Terms :
Lenders use a borrower’s credit score to gauge the risk associated with lending money to that individual. They prefer lending to people with a good credit record because they generally believe that a good score as a sign of stability and dependability. A higher credit score also means that they are less likely to default on their EMIs. Hence a good credit score improves the chances of a loan approval.
Borrowers, on the other hand, can leverage a healthy credit score to negotiate for preferential interest rates, loan amount, tenor, etc.
- Availing a Business Loan:
If you have an existing business, or plan to establish one, it is highly likely that you will require some seed funding. A healthy credit score can help here. Banks and other financial institutions also consider an individual’s credit score while appraising a business loan application from a proprietor-led company.
- Credit Score Based on Employer Brand:
The interest rate you pay is also influenced by the nature of the company you work with. Traditionally, lenders give preferential rates to individuals working with MNCs or blue-chip companies and charge higher interest to clients working with relatively unknown entities. However, there are now banks that offer equally competitive rates to individuals working with smaller companies as well.
Credit Score for Hiring
A poor credit score can also affect employability. Employers from sectors like IT & ITeS, banking and even the Government, conduct ‘financial credit screening’ as a part of their recruitment process. Companies view individuals with a poor score as more likely to engage in unscrupulous activities, compared to financially disciplined employees (those having good scores).
Hence, a good credit score positively affects your overall current as well as future financial prospects. It is certainly a good idea to ensure that you maintain the credit score.
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