If you are a person who regularly maintains their funds, you must have heard of the term ‘Credit Score’. It refers to a three digit number that indicates your possibility to avail loans by demonstrating your financial conditions and background.
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From individuals to companies, every entity can have its own credit score. For individuals, the score ranges between 300-900 and for companies, it ranges between 0-100. The closer you are to the maximum number in both the cases, the better it is for you. Let us walk through the ideal numbers to apply for various kinds of loans.
What Is a Credit Score/CIBIL Score?
A credit score is a three digit number that indicates the financial conditions and summarizes an individual’s credit history. Generally, a score above 700 is considered as a good score and brings in the possibility of loan sanctioning without any credit ranking problems. There are multiple factors that determine the range of your credit score. Adapting small habits such as repayment of credit card payments on change can positively affect your credit score. Your CIBIL score is an extremely important factor in determining your loan eligibility.
What Are the Credit Score Ranges?
RBI has given the authority to officially calculate the credit score of individuals and companies to four credit bureaus i.e., CIBIL, Experian, Equifax, and CRIF High Mark. These credit bureaus have standardized the range of credit score into 5 different levels:
| Credit score | Ratings |
|---|---|
| 300-579 | Poor |
| 580-669 | Average |
| 670-739 | Good |
| 740-799 | Very Good |
| 800-900 | Excellent |
Percentage of Score Factors?
While calculating the credit score, these credit bureaus consider various factors before allotting you a credit score and rating. While these factors can be improved with time through improvising basic living methods, they should not be taken lightly as they heavily impact your credit score.
Following is a list that indicates the percentage of each crucial factor in the calculation of the credit score.
| Factors | Percentage |
|---|---|
| Payment history | 35% |
| Outstanding payments | 30% |
| Length of credit history | 15% |
| Credit mix | 10% |
| New loan applications | 10% |
Ideal Score for Various Types of Loans
Not every type of loan needs a credit score of 800 above, there are loans you can get on a credit score below that. Let us have a look at the ideal score for different types of loans
| Type of loan | Credit Score |
|---|---|
| Conventional mortgage loan | 620 |
| Jumbo mortgage loan | 700 |
| FHA mortgage loan | 500 |
| VA mortgage loan | 620 |
| USDA mortgage loan | 580 |
| Car loan | 350 |
| Personal loan | 670 |
| Student loan | 600 |
| Unsecured credit card | No credit check |
| Secured credit card | Varies on cards |
| Apartment rental | 650 |
How is CIBIL Score Calculated?
To calculate CIBIL score of anyone, few are some major factors that are taken into consideration in accordance with it’s impact on the credit score.
- Payment history: This factor includes all your outstanding payments of credit cards, loans and other credit accounts. If you have a habit of paying all your credit card payments timely, it will help you maintain a good credit score. Payment history holds a great amount of importance while calculating the credit score, and if you fail to maintain the required score, you may not be able to take loans.
- Credit utilization ratio: This ratio calculates the amount of credit score used by you in relation to the entire credit card limit. In simple terms, the more you use it, the more credit you have taken, which raises the possibility of a discrepancy in the eyes of the financial institution. It is advised to use 30% of your credit limit.
- Credit mix and length: If you have various credit accounts such as credit cards and loans, it is a favorable situation for you as it indicates your efficiency in maintaining various credit accounts. As of length, the longer the credit history, the better. Credit length demonstrates your ability to manage credit over a long time period.
- Credit inquiry: Everytime you apply for a new credit loan, you are inquired. Every financial institution makes sure to inquire about the times you have applied for a new loan. It is important to limit this number to improve your creditworthiness.
How Can I Improve My CIBIL Score?
You may discover that your CIBIL score is lower than you expected, but there are a few measures you can take to progressively improve your CIBIL score.
- Timely payments: Always make your credit accounts payments at the earliest possible. Having numerous outstanding payments affects your credit score negatively. You can also set up automatic payments to avoid missing any deadlines.
- Aim at low credit utilization: Try to use only 30% of your credit limit and keep your credit utilization low in relation to your overall credit limit.
- Expanding credit limits: Requesting an increased credit limit from your lender and maintaining your spendings can increase your credit score.
- Lessening credit applications: Try to limit your credit applications as before sanctioning any loan, your new credit applications are inquired. The higher the amount of applications, lesser are the chances of attaining a loan.
If you ever plan to take a loan down the road, do make sure you have maintained a good credit score in the past years. It takes very simple steps to maintain an acceptable credit score but in times of crisis, these easy steps can lead to a big financial help.
Disclaimer: This blog is written to make it easy for readers to understand complicated processes. Some information and screenshots may be outdated as government processes can change anytime without notification. However, we try our best to keep our blogs updated and relevant.
