A credit score is a number ranging from 300 to 850 that represents a consumer’s creditworthiness. The higher the score, the more appealing a borrower appears to potential lenders. A credit score is determined by credit history, which includes the number of open accounts, total amounts of debt, repayment history, and other criteria. Lenders use credit ratings to assess the likelihood that a borrower will repay loans on time.

How Does It Work?

A credit score can have a huge impact on your financial life. It is an important factor in a lender’s decision to extend credit to you. People with credit ratings lower than 640, for example, are considered subprime borrowers. Lending institutions frequently charge higher interest rates on subprime mortgages than on regular mortgages to compensate for carrying additional risk. For borrowers with poor credit, they may additionally request a shorter payback period or a co-signer.

A credit score of 700 or higher, on the other hand, is generally considered favourable and may result in a borrower having a reduced interest rate, resulting in them paying less money in interest over the life of the loan. Scores of 800 or higher are considered outstanding. While each creditor establishes its own credit score ranges, the average FICO score range is commonly employed.

• Excellent: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

How to Maintain a Good Credit Score?

• Consistent Repayment: Your payment history accounts for almost 35% of your credit score computation. If you want to keep your credit score high at all times, your payback history should be flawless. You must make certain that you never miss a repayment.
• Low Credit Utilization: According to experts, keeping your credit card utilisation ratio below 30% will help you build a decent credit score over time. It suggests that you are not in need of credit. A strong credit score can be harmed by exceeding credit card limits or falling behind on bill payments. As a result, only use your credit card when it is really necessary or when you are unable to pay in cash.
• Credit Diversification: Lenders frequently try to check the breadth of your credit exposure. Having a diversity of credit is a positive reflection on your credit record and helps you keep a decent credit score. To achieve a good credit mix, use a credit card and choose both secured and unsecured loans.
• Avoiding Multiple Credit Applications: You may find yourself applying for multiple credit cards or loans in the hopes of finding a decent deal. This, however, can have a negative impact on your credit score. The lender does a hard enquiry every time you seek for loan. Multiple hard inquiries will have a negative influence on your credit score. If your credit application is denied, lenders will be hesitant to grant you money in the future. To preserve a decent credit score, avoid applying for various credit choices.
• Credit History: When you get your first credit card, it will take a few months for your credit score to be updated. This could be anything from 3 to 6 months. Due to a lack of credit history, this makes evaluating your credit profile difficult for the lender. A long credit history provides a complete insight of your credit behaviour, which is vital in credit acceptance. As a result, keeping credit active and borrowing on a regular basis are critical for maintaining a strong credit score.
• Closing Old Credit Cards: If you have accumulated an excessive number of credit cards, you should consider closing those that are no longer required. Closing an old credit card, on the other hand, can have an impact on your credit score. This is due to the fact that the duration of your credit history is also significant for your credit score. As a result, carefully consider the possibilities for credit cards that can be closed in order to avoid unnecessary debt accumulation.
• Avoid Paying Only the Minimum Due: Most credit card companies allow you to pay up to 5% to 10% of the outstanding balance as the minimum due amount. You can avoid a late payment or default this way. The remaining balance, with interest, is carried forward to the next bill cycle. If you want to avoid interest accumulation in the long run, attempt to pay the entire bill rather than just the minimal amount required. Always pay in full and on time to keep your credit score high.
• Score Builder Loans: There are currently exclusive loans on the market that are created for new credit users with no borrowing history. These are referred to as score builder loans. These loans may be in modest amounts and are primarily intended to help you boost your credit score. You will have a positive credit score if you repay the loan on time, which will make you eligible for a variety of additional credit products at better conditions.

Top 7 Credit Rating Agencies in India

1. Credit Rating Information Services of India Limited (CRISIL)
2. Investment Information and Credit Rating Agency of India (ICRA) Limited
3. Credit Analysis and Research (CARE) Limited
4. Acuite Ratings & Research (earlier SMERA Ratings Limited)
5. Brickwork Ratings India Private Limited
6. India Ratings and Research Pvt. Ltd.
7. Infometrics Valuation and Rating Pvt. Ltd.