What is Credit Score and importance of credit score?

08-April-2015 written by : FSI-Team

With the turn of a millennium, Indian economy has managed to keep its progress pace steady or rather it won't be wrong to say it has accelerated its pace considerably over the due course of time. As financially, conditions are becoming favourable in markets, businessmen are opting for expansion of their businesses. On the flip side, increased investments and profits have ultimately paved way for increased demands from the common man. As demand exceeds over availability of disposable income it becomes necessary to go for credit borrowings.

To put it up in simple language, credit borrowings refer to financial help provided to an individual by lenders or financial institutions for a stipulated period of time. As the term ends, the individual is expected to pay back borrowed amount along with some interest on the borrowed amount. However lenders don't issue the needed amount directly, they demand to check your credit report that reflects upon your credit score.

Credit score is a numeric data that is determined by your credit history. It determines your creditworthiness. It is formed on the basis of your credit records, your credit score revolves around detailed information about: the amount that you have borrowed in the past, payment of bills, time period required, missed current payments, so on and so forth.

Generally credit score ranges between 0 and 1000. Among this range, a score above a certain benchmark which varies as per different bureaus, is considered to be ideal, in case your credit score is below that particular score, then lenders might not consider you as a potential candidate for the loan; on contrary if your score is more than that benchmark set up by respective bureau whose credit report the lender considers, then definitely you are in the good books of the lenders. Credit score is often being divided or recognised by lenders as good credit score and bad credit score. Good credit score ensures fulfilment of needed credit while bad credit shows bad debts, delayed payments and ultimately portrays bad impression of an individual on lenders. There are also few scenarios where the score is represented as zero, this happens when no financial record of the individual is available. In such scenario, the individual can make use of their credit cards, take consumer durable loans and other basic steps to build their positive credit history and bureau records.

While the range provided about credit score, determines a specific numeric score requirement; however the rate of interest given or the decision whether to provide credit based on credit score is subjective in nature. Various methods are used to calculate credit score- linear regression, hazard rate modelling, weight of evidence models and list goes on. Although in India, we have four credit bureaus working on maintaining your credit history, CIBIL credit score is the most popular credit score report reviewed by major banks and financial institutions, followed by Equifax and others.

Among all the factors considered by lenders before giving credit, credit score has its own share of weightage. Since credit score has so much of importance attached to it, individuals are advisable to check their credit score before going to the lenders. If checked earlier, you can always work on improvement of your credit score if you have a bad credit score. Thus, in this way you manage to wipe off all your bad debts if any and improve your credit score.

To sum it up, check your credit score once a while, so that when you need credit, you don't have to wait for a long time. After all a stitch in time saves nine!



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