Do You Know Why Your Credit Score is Calculated for Financial Decisions?

10-Apr-2019 written by : FSI-Team

Calculated for Financial Decisions?

If you have ever applied for a personal loan, auto loan, credit card, etc. then you may already know about credit score. It’s a numerical representation of your creditworthiness i.e. a score which is calculated and provided by several credit rating agencies viz. CIBIL, High Mark, Experian, etc. However, do you know how and why it’s calculated in the first place? Let’s find out.

How is the Credit Score Calculated?

Your credit score is calculated on the basis of several factors which include:

Repayment History

Your credit repayment history covers the EMIs of your loans (SBI Home loans, ICICI personal loans, etc.), credit card payments, and even insurance premiums. If you pay your bills and EMIs on time, then your score will be high. However, if any of your payments are delayed, then it can affect your score in a negative manner.

Credit Utilization Ratio

Credit utilization ratio is the ratio of your credit card limit and your monthly spending. For instance, if you are spending around Rs. 40,000 a month with your credit card and its limit is Rs. 1 lakh, then the credit utilization ratio will be 40%. Again, a high ratio is not good for your score and you want it to be below 35%.

Length of Credit History

The age of your credit history also plays a big role in your free cibil score. Those whose credit history is longer are able to get a higher score than those whose have a short history.

Why is Credit Score Calculated for Financial Decisions?

There are many reasons why lenders and credit card providers calculate your score. However, the most important one is risk assessment. Think about it, when a customer approaches their bank for a loan, then it’s the responsibility of the bank to measure the creditworthiness of the individual before it makes any decision. This is because it has to keep the number of non-performing assets (NPAs) or bad loans as less as possible, and the customer’s free cibil score can help it to decide whether it’s safe to approve the loan for them or not.

Your score can also tell something about your personality. For instance, those individuals whose cibil score is above 750 i.e. in the “good” category, are also likely to be disciplined in their lives. This is because you need to be a responsible person to fulfill your duties and achieve a high score.

What are the Advantages of a High Credit Score?

Now that you know how and why a credit score is calculated, let’s take a look at some of the biggest reasons to have a high score. These are:

Easy Approvals

It’s a lot easier to get loans when you have a high score, and it applies to all kinds of loans such as SBI home loans and auto loans, PNB personal loans and student loans, etc. In fact, you may also qualify for pre-approved loans in which case there are even fewer formalities and paperwork.

Better Interest Rates

When your score is high, then the risk for the lender is low. This is why you may get much better rates on your loans than other customers. You can yourself negotiate with the bank and draw their attention to your excellent credit history and rating. In most cases, you will be able to get a good deal.

Higher Limits

When you want a loan or credit card, then you want to be able to get as much money as possible. Unfortunately, this can only happen if your credit score is high. Those who have a low score are usually provided only small loans.

Your credit rating is way more important than you think, and the key to its maintenance is developing good credit habits. So, try to pay your EMIs and credit card bills on time and use your credit cards responsibly. You should also avoid closing your old bank accounts and credit card accounts as they increase your credit history which is required for a high score. So, be responsible and good luck!



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