If you are new to loan applications and credit cards, make sure to understand how the credit score works. From payment of your credit card bill to cancellation of the card – every financial decision has a direct or indirect impact on your credit score. Here we give a lowdown on the maze of credit score and how it is shaped by your credit behaviour.
If someone is new to the world of loans and credit cards, it is important to make note of these key points.
Credit score: A beginner’s guide
I. Where to check: At the outset, a credit score can be checked by one of the four credit information companies (CIC) in India: Equifax, CIBIL, CRIF High Mark and Experian.
II. Check regularly: It is recommended that you check the credit score on a regular basis – ideally once a year. This leads to a soft inquiry, which helps you spot mistakes in your credit report.
III. Key determinants: There are several key determinants of credit score, including payment history, credit dues, regularity with which credit card bills are paid, credit utilisation ratio and credit mix, among other factors.
IV. Increase or decrease in score: There could be an increase or decrease in credit score with the passage of time, based on the credit behaviour of customers. For instance, routinely delaying bill payments can lead to a fall in credit score.
V. Hard inquiry: When someone applies for too many loans in a short period of time, it leads to a hard inquiry, which could have a marginal impact on the credit score.
VI. Credit Use: Despite having a high credit limit, it is recommended to use only a portion of it (up to 30 per cent) to maintain a high credit score. There is a misconception that using the entire credit limit does not lead to any impact on the score.
VII. Credit mix: Typically a healthy credit score requires the customer to use diverse credit options which include both secured loan (e.g., car loan) and unsecured loan (credit card and personal loan).
Disclaimer: Mint has a tie-up with fintechs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
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