Skip to main content

What is Credit Score? Why is it important?

Seen advertisements promising easy loan for borrowers with higher credit score? Or heard about denial of credit card due to a low credit score? But what is credit score and why is it so important?

What is credit score?

Like we get grades in schools for academic performance, the credit score represents our credit behavior and ability to pay back. It is a 3 digit score which ranges from 300 to 900, where 900 is the highest score.

How is credit score calculated?

The banks and financial institutions send the details of the credit accounts with them to the Credit Information Companies (CICs), who processes the collected information and calculates the credit score. This credit score along with details of credit accounts are made available to the borrowers in the form of a credit report, through online / offline mode.

CICs generally consider following factors for arriving at a credit score –

  1. Length of credit history
  2. Recent defaults in the credit accounts
  3. Repayment patterns
  4. Credit score enquiries from banks to process the credit applications 
  5. Mix of credit, i.e., unsecured loans, personal loans, credit cards etc.

Factors like occupation, income, savings, etc. do not have impact on the credit score.

Why credit score is important?

A good credit score can make it easy to avail a credit at favorable terms like higher loan, lower interest, lower charges, etc., whereas, a low credit score may result in denial of credit or approval at more stringent credit terms.

How to keep good Credit Score?

  1. Always pay dues on time.
  2. Do not borrow heavily.
  3. Monitor loans where you have co-signed, guaranteed or having joint loan accounts.
  4. Avoid applying for multiple loans or credit cards within a short span of time as it may adversely impact credit score.
  5. Maintain a healthy credit mix of secured (such as home loan, auto loan) and unsecured loans (such as personal loan, credit cards). 
  6. Review your credit score regularly and report the discrepancies to CICs.

What if there is a mistake in credit report?

The discrepancy in the credit report can be taken up with the CICs by filing a dispute online / offline.

Can frequent enquiry of credit score affect adversely?

There are 2 kinds of enquiries – hard enquiry and soft enquiry. 

  1. Enquiry made by an individual to know his / her credit score is called soft enquiry. Such enquiries do not affect the credit score.
  2. The enquiries made by banks or financial institutions to decide on a credit application is called hard enquiry. Such multiple enquiries, if carried out in a short span of time, may adversely affect the credit score as it indicates higher credit needs of the customer. 

Free Annual Credit Report to Individuals

With effect from January 1, 2017, individuals can get free full credit report (FFCR) once in a calendar year from each of the 4 CICs, i.e. 4 free credit reports in a year. More than one report can be obtained from any particular CIC at a cost.

Credit Information Companies (CICs) in India

  1. TransUnion CIBIL
  2. Experian
  3. Equifax
  4. CRIF High Mark 

Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Digital Payments – E-mandate Framework 2026

Reserve Bank of India (RBI) has issued e-mandate framework for digital payments. What is an e-mandate?  A mandate is a standard instruction that a customer provides to his / her issuing bank and other institutions allowing them to automatically debit the mentioned amount from his / her bank account. e-mandate is the electronic version of it. To whom shall the framework be applicable? The framework shall be applicable to Payment System Providers and Payment System Participants. To which transactions shall the framework be applicable? The framework shall be applicable to processing of recurring transactions, domestic or cross-border, using cards / Prepaid Payment Instrument (PPI) / Unified Payments Interface (UPI). What are the guidelines for registration and revocation of e-mandate? A customer desirous of opting for e-mandate facility shall undertake a one-time registration process. The mandate shall be registered only after successful validation of additional factor of authenticati...
Post a Comment
Read more

Guidelines to facilitate faster cross-border inward payments

Reserve Bank of India (RBI) has issued guidelines to facilitate faster cross-border inward payments. What is the rationale behind the guidelines? The RBI’s Payments Vision 2025 aims to bring efficiency in the cross-border payments aligning with the G20 roadmap for cross-border payments that has set targets for achieving cheaper, faster, more transparent, and more accessible cross-border payments. One of the challenges with speed of cross-border payments is experienced at the beneficiary leg i.e., the time taken from receipt of the payment at the beneficiary bank till credit to the beneficiary account. What are the guidelines to facilitate faster cross-border inward payments? Banks shall inform their customer of the receipt of cross-border inward transactions immediately on receipt of inward message. Messages received after close of operating hours of banks shall be informed to customer immediately at the start of the next business day. Banks shall undertake reconciliation and confirmat...
Post a Comment
Read more

Guidelines on Money Changing Activities (Updated as on April 02, 2026)

Reserve Bank of India (RBI) has updated the guidelines on money changing activities. Who is Authorised Person? Authorised Person means an authorised dealer, money changer, off-shore banking unit or any other person authorised under section 10(1) of Foreign Exchange Management Act, 1999 (FEMA) to deal in foreign exchange or foreign securities. What are the categories of Authorised Persons? Authorised Dealer (AD) Category-I – entities which are authorised by RBI to carry out all permissible current and capital account transactions. Authorised Dealer (AD) Category-II – entities which are authorised by RBI to carry out specified non-trade related current account transactions, all the activities permitted to Full Fledged Money Changers (FFMC) and any other activity as decided by RBI, and include (i) Upgraded FFMCs; (ii) Select Regional Rural Banks (RRBs); (iii) Select Urban Cooperative Banks (UCBs); and (iv) Other entities. Authorised Dealer (AD) Category-III – entities which are authorised...
Post a Comment
Read more

Continuous Clearing and Settlement on Realisation in Cheque Truncation System (CTS) (Updated as on December 24, 2025)

Reserve Bank of India (RBI) has issued direction on continuous clearing and settlement on realisation in Cheque Truncation System (CTS). What is Cheque Truncation System (CTS)? Cheque Truncation System (CTS) involves halting the physical movement of the cheque and its replacement by images of the instrument and the corresponding data contained in the MICR line.  In CTS, 3 images are taken of each cheque – front Gray Scale, front Black & White and back Black & White. MICR (Magnetic Ink Character Recognition) is a 9-digit code printed at the bottom of cheques using magnetic ink – first 3 digits indicate City Code, middle 3 digits indicate Bank Code and the last 3 digits indicate Bank Branch Code. Only CTS-2010 standards compliant instruments can be presented for clearing through CTS. The presenting banks which truncates the cheques need to preserve the physical instruments for 10 years. From when will the continuous clearing and settlement on realisation in CTS be implemented...
Post a Comment
Read more

FEMA - Borrowing and Lending [including External Commercial Borrowing (ECB) and Trade Credit (TC)]

Reserve Bank of India (RBI) has amended the regulations for borrowing and lending under the Foreign Exchange Management Act, 1999 (FEMA). What are the regulations for External Commercial Borrowing (ECB)? External Commercial Borrowing (ECB) means borrowing by an eligible borrower from a recognised lender. Eligible borrowers – Any person resident in India (other than an individual) that is incorporated, established or registered under a Central or State Act is an eligible borrower, provided such person is permitted for ECB in terms of applicable Acts. An eligible borrower that is under a restructuring scheme or corporate insolvency resolution process may raise ECB only if specifically permitted under the restructuring or resolution plan. An eligible borrower against whom any investigation, adjudication or appeal by a law enforcement agency for contravention of any rule, regulation or direction issued under FEMA is pending, may raise ECB notwithstanding the pending investigation or adjudi...
Post a Comment
Read more