Understanding Your Credit Score_ What It Is, How It Works

1. Understanding Your Credit Score: What It Is, How It Works Your credit score is a three-digit number that summarizes your credit history and reflects your creditworthiness. It is one of the most important factors that lenders consider when you apply for loans, credit cards, mortgages, and other forms of credit. A good credit score can help you get approved for credit, qualify for lower interest rates, and save money in the long run. A bad credit score can make it harder to access credit, increase your borrowing costs, and affect your financial future. What is a credit score? A credit score is a numerical expression based on a level analysis of your credit files, to represent your creditworthiness. A credit score is primarily based on your credit report, which is a record of your credit activity, such as your payment history, outstanding balances, credit mix, credit inquiries, and other factors. Your credit report is compiled by credit bureaus, such as CIBIL, Experian, Equifax, and CRIF High Mark, based on the information provided by your lenders and creditors. There are different types of credit scores, such as FICO, VantageScore, and CIBIL, that use different scoring models and ranges to evaluate your credit risk. However, the most commonly used credit score in India is the CIBIL score, which ranges from 300 to 900. The higher your CIBIL score, the more likely you are to repay your debts on time and the lower your credit risk. Generally, a CIBIL score of 750 and above is considered good and preferred by most lenders.

2. How is a credit score calculated? Your credit score is calculated using a complex algorithm that takes into account various factors from your credit report. Each factor has a different weightage or impact on your credit score. According to CIBIL, the following are the main factors that influence your credit score: ● Payment history (35%): This is the most important factor that affects your credit score. It shows how timely and consistently you have paid your EMIs and credit card bills in the past. Any late or missed payments, defaults, settlements, or write-offs will negatively impact your credit score, as they indicate that you are not reliable or responsible with your credit obligations. ● Credit utilization (30%): This is the ratio of your total outstanding credit balance to your total available credit limit. It shows how much of your credit you are using at any given point of time. A high credit utilization ratio means that you are overusing or maxing out your credit, which can lower your credit score, as it indicates that you are credit-hungry or under financial stress. A low credit utilization ratio means that you are using your credit wisely and sparingly, which can boost your credit score, as it indicates that you are managing your credit well and have enough income to support your expenses. ● Credit history length (15%): This is the duration of your credit history, which is measured by the average age of your credit accounts. It shows how long you have been using credit and how experienced you are with it. A longer credit history can improve your credit score, as it demonstrates that you have a proven track record of handling credit over time. A shorter credit history can lower your credit score, as it provides less information for the credit bureaus to assess your credit behavior. ● Credit mix (10%):

3. This is the diversity of your credit portfolio, which is determined by the number and types of credit accounts you have, such as loans, credit cards, mortgages, etc. It shows how well you can handle different kinds of credit and debt. A balanced credit mix can enhance your credit score, as it shows that you are capable of managing various credit products and obligations. A skewed or limited credit mix can reduce your credit score, as it shows that you are either too dependent on one type of credit or have limited exposure to credit. ● Credit inquiries (10%): This is the number of times you have applied for new credit in the recent past, which is recorded as hard inquiries on your credit report. It shows how often you seek new credit and how credit-hungry you are. Too many credit inquiries in a short span of time can hurt your credit score, as they imply that you are desperate for credit or facing financial difficulties. Fewer credit inquiries in a longer period of time can help your credit score, as they imply that you are prudent and selective with your credit applications. Why does your credit score matter? Your credit score matters because it affects your ability to access credit and the terms and conditions of your credit products. Your credit score can have a significant impact on your financial opportunities and goals. Here are some of the reasons why your credit score matters: ● Loan and credit card approval: Your credit score is one of the first things that lenders check when you apply for a loan or a credit card. It helps them determine your eligibility and suitability for the credit product. If your credit score is low, lenders may reject your application outright or offer you unfavorable terms, such as higher interest rates, lower loan amounts, shorter repayment periods, or higher fees and charges. If your credit score is high, lenders may approve your application faster and offer you better terms, such as lower interest rates, higher loan amounts, longer repayment periods, or lower fees and charges. ● Interest rates and charges: Your credit score also influences the interest rates and charges that you pay for your credit products. Interest rates and charges are the costs of borrowing

4. money from lenders. They vary depending on the type and amount of credit, the lender, and the borrower. Generally, the lower your credit score, the higher the interest rates and charges you have to pay, and vice versa. This is because lenders charge higher interest rates and fees to compensate for the higher risk of lending to borrowers with low credit scores. Conversely, lenders charge lower interest rates and fees to reward borrowers with high credit scores for their lower credit risk. ● Savings and earnings: Your credit score also affects your savings and earnings potential in the long run. The interest rates and charges that you pay for your credit products have a direct impact on your monthly cash flow and budget. The higher the interest rates and charges, the more money you have to spend on your debt repayments, and the less money you have left for your savings, investments, and other expenses. The lower the interest rates and charges, the less money you have to spend on your debt repayments, and the more money you have left for your savings, investments, and other expenses. Therefore, a good credit score can help you save money, earn more interest, and achieve your financial goals faster. A bad credit score can cost you money, lose interest, and delay your financial goals. How to improve your credit score? Improving your credit score is not a one-time activity, but a continuous process that requires discipline, patience, and commitment. It may take several months or even years to see a significant improvement in your credit score, depending on your current credit situation and behavior. However, it is not impossible to improve your credit score, if you follow some simple and effective tips, such as: ● Pay your EMIs and credit card bills on time and in full: This is the most important and easiest way to improve your credit score. As we have seen, your payment history accounts for 35% of your credit score, so making timely and complete payments can have a positive impact on your credit score. It shows that you are responsible and consistent with your credit obligations and can be trusted by lenders. On the other hand, missing or delaying your payments can have a negative impact on your credit score, as it shows that you are unreliable and inconsistent with your credit obligations and pose a high credit risk to lenders. Therefore, you should always pay your

5. EMIs and credit card bills on or before the due date and avoid any defaults, settlements, or write-offs. ● Keep your credit utilization ratio low: This is another important and effective way to improve your credit score. As we have seen, your credit utilization ratio accounts for 30% of your credit score, so keeping it low can boost your credit score. It shows that you are using your credit wisely and sparingly and have enough income to support your expenses. Ideally, you should keep your credit utilization ratio below 30%, which means that you should not use more than 30% of your total available credit limit at any given point of time. For example, if your total credit limit is Rs. 1 lakh, you should not use more than Rs. 30,000 of it. On the other hand, having a high credit utilization ratio can lower your credit score, as it shows that you are overusing or maxing out your credit and are under financial stress or credit-hungry. Therefore, you should try to reduce your credit balances, pay off your debts, and avoid making large or unnecessary purchases on your credit cards. — Get Overdraft Loan and personal loan at low interest rate only with the help of Bravima solution