What is a credit score?

Short answer: A credit score is a numerical representation of your creditworthiness, used by lenders to evaluate risk when approving loans and other credit products.

A credit score is a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports. Companies use credit scores to make decisions on whether to offer you a mortgage, credit card, auto loan, and other credit products, as well as for tenant screening and insurance. They are also used to determine the interest rate and credit limit you receive.

In India, credit scores range from 300 to 900 points, with higher scores indicating better creditworthiness. The two major credit bureaus in India, CIBIL (Credit Information Bureau) and Experian, provide these scores based on your payment history, credit utilization, length of credit history, new credit inquiries, and types of credit used.

Understanding how credit scores are calculated is crucial for maintaining a good score. Payment history accounts for about 35% of your CIBIL score, with timely payments being the most significant factor. Credit utilization (the percentage of available credit you use) makes up around 30%, so keeping balances low on credit cards and loans can improve your score.

Length of credit history contributes to 15% of your score, which means that having a longer credit history generally benefits your score. New credit inquiries account for about 10%, as frequent applications for new credit can negatively impact your score. Lastly, the types of credit used make up around 10%, with a mix of different credit products (like loans and credit cards) being favorable.

To improve or maintain a good credit score in India:

- Pay all bills on time.

- Keep credit card balances low.

- Avoid applying for multiple credit facilities simultaneously.

- Use various types of credit to show financial diversity.

- Regularly check your credit report for inaccuracies and dispute any errors.

Regular monitoring of your credit score through services provided by CIBIL or Experian can help you stay informed about your financial health and take proactive steps to improve it.

Sources: What is a Credit Score? | myFICO · What is a credit score? | Consumer Financial Protection Bureau · Credit Scores | Consumer Advice · What Is a Credit Score & Why Is It Important? | Equifax · Understand, get, and improve your credit score | USAGov

This explainer was researched and drafted by the Investdesk AI Desk to answer a question readers commonly ask. It is general information, not personalised financial advice.