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A credit score is a three-digit numeric representation of your credit history, reflecting your past credit behavior and how effectively you have managed credit products such as personal loans, credit cards, home loans, business loans, auto loans, overdrafts, and credit lines. Commonly referred to as a CIBIL score, it primarily indicates your creditworthiness and ability to borrow from banks, NBFCs, and other financial institutions. The CIBIL score is calculated and generated based on credit information reported monthly by lenders to credit bureaus.

In simple terms, your credit score indicates to lenders whether you are a reliable borrower with minimal risk or a potentially risky one. It also reflects the likelihood of you repaying a new loan on time. When you apply for a loan or credit card, the lender checks your credit report from a credit bureau to assess your repayment ability and overall creditworthiness.

The CIBIL score ranges from 300 to 900, with higher scores indicating a greater likelihood of lenders approving your credit applications. Typically, a credit score of 760 or above is considered a strong benchmark and is preferred by lenders for loan or credit card approvals. However, some banks and NBFCs may also approve credit card applications for individuals with a credit score of 700 or higher.

Benefits of a Credit Score

Your credit score is one of the primary factors that a lender, whether a bank or an NBFC, evaluates when reviewing your loan or credit card application. If your credit score is low, it is crucial to improve it as soon as possible, as a low score may lead to the lender rejecting your application outright without further consideration.

If your credit score is high, the lender will look into other details to determine, such as your creditworthiness and repayment capacity. Thus, a good credit score increases the chances of your loan application's approved and helps in availing funds at ease.

However, your credit score is not the sole factor determining your eligibility for new credit. Lenders also assess other critical aspects such as your income, repayment capacity, debt-to-income ratio, employment history, and profession before deciding to approve or reject your loan or credit card application.

A good CIBIL score would not only help you access credit, but it may also help reduce your interest outgo for a loan. Many banks/NBFCs offer preferential low-interest rates to applicants with a good credit score and repayment history.

What is a Good Credit Score?

Today, most lenders consider a credit score of 760 and above from CIBIL or any credit bureau as a good credit score. Getting the loan or credit card application approved becomes relatively easier if you have and maintain a CIBIL score of 760 or above and as close to 900. It is possible to have a CIBIL score of 760 or above and have a credit score from another bureau below 700 at the same time. Hence, you must keep a tab on credit scores from multiple bureaus. It is advisable to check your credit score once every month.

How a Credit Score is Calculated?

Your credit score depends on a lot of factors that a credit bureau or Credit Information Companies (CICs) takes into consideration while calculating your CIBIL score. These factors depict your past credit behavior and are reported to banks and NBFCs, every time you apply for a fresh credit product.

5 Factors that Affect your Credit Score

1. Loan Repayment History: Timely payments can boost your credit score and help in improving it significantly. Defaulting on your EMIs or making late payments negatively affects your CIBIL score. Your loan repayment history has a high impact on your CIBIL score calculation.

2. Duration of Credit History: The duration or age of your credit history also affects your credit score. If you have used credit cards/loans for a long period and made timely payments on them, then it's a sign of disciplined credit behavior. It has a medium impact on your credit score.

3. Number of Hard Inquiries: Every time you apply for a new credit product, the lender inquires about your credit score. Such inquiries by lenders and financial institutions are known as hard inquiries. Too many hard inquiries may negatively affect your credit score as it shows you to be credit-hungry. Multiple hard inquiries at the same time may have a considerable short-term impact on your credit score. However, if you check or download your credit report, it is considered a soft Inquiry that has no impact on your credit score.

4. Credit Utilization: The ratio of the credit amount you spend to the credit amount available to you is known as the credit utilization ratio. It is recommended to keep your CUR to less than 30% of your available credit limit, though even a higher CUR barely has an impact on your credit score as long as you pay your credit card bill on time. However, maxing out the limit on your credit card frequently may indicate a high dependency on credit, which may negatively impact your credit score.

5. Credit Mix: If you have taken different kinds of loans like personal, auto or home loans and have responsibly paid them back, it shows your ability to handle different kinds of credit. Building a good credit mix over time has a positive impact on your credit profile. Also, if you have taken too many unsecured loans like personal loans, it shows you are credit-hungry and excessively dependent on credit. This may have an impact on your credit score, but if your repayment record is strong, it's unlikely to be anything significant.