Photograph by Menty Jamir

What constitutes credit can be a vague, elusive and somewhat intimidating concept, despite how ubiquitous it is. One of the key metrics in this realm is the credit score. It can mean the difference between financial well-being, and the lack thereof. So, what exactly is a credit score — and how do you discern if you have a good one? Simply put, a credit score is a three-digit numeric representation of a person’s credit-worthiness, usually ranging between 300 to 900. Banks and financial institutions use your credit score as a metric to judge your reliability and the likelihood of repaying your borrowings on time.

In India, and the world over, there are many credit bureaus — such as CIBIL, Experian, Equifax and CRIF High Mark — whose job it is to maintain credit history, compile credit reports and calculate credit scores. The Reserve Bank of India requires commercial banks to provide credit data to these credit bureaus. The bureaus maintain detailed financial records of an individual, including their loan accounts, outstanding payments, loan enquiries, EMIs and how many credit cards they have. These factors are what determine a person’s credit-worthiness and by extension, their credit score. 

Different banks and bureaus have different standards for what to consider a good, bad or average credit score; though a score of above 700 is considered to be good. People with high credit scores tend to find it much easier to avail credit from commercial banks.

Your credit score can also have adverse effects on your personal finances. People with lower credit scores are generally given higher interest rates, if they are able to avail credit at all. In turn, higher interest rates will mean an extended timeline on paying off a loan, which in turn may negatively affect the long-term cash flow. On the other hand, people with higher credit scores may be able to pay off their loans sooner and have more disposable income. 

How then do you build a good credit score? Consistency and punctuality are the key words here. The best way to maintain a good credit score is to make all your credit payments — this includes credit card bills, EMIs, loans and interest payments — in a timely manner. Defaulting on or delaying your payments will lower your credit score. It also helps to keep an eye on your credit limit. Additionally, making too many loan enquiries at different banks can also have a detrimental effect, as this information too is sent to the credit bureaus. Having too many unclosed loans and credit instruments in your portfolio might also increase the chance of landing you in a tricky credit situation, even if you’re making all your payments on time. 

If, by chance, your credit score does fall, the good news is that you can take measures to improve it. Avoid taking on more liabilities. The best step would be to reduce the amount of credit you have through the “avalanche” method, which involves paying off the liability with the highest interest rate first before targeting other liabilities. After your outstanding liabilities are paid off, the way forward is very simple: pay your bills on time and avoid taking on more liabilities.

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