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Have you ever wondered why loan interest rates are often specified as a range? Like 10.25% per annum to 15.65% per annum? That’s because banks offer loans to different borrowers at different interest rates. So, what determines whether you are charged interest at the lower end of the spectrum or the higher end?
The answer lies, for the most part, in your credit rating or your credit score.
If you’ve not heard of this term before, or if you don’t know your credit rating, you’re not alone. A survey by Home Credit India showed us that around 68% of the respondents were not aware of their credit score - despite already having taken a loan.
But it’s never too late to learn. So, let’s get down to the basics and take you through all you need to know about credit ratings.
What is a credit rating?
A credit score or a credit rating essentially reflects how credit-worthy an individual is. In simple words, it tells a lender whether a borrower is likely to repay the loan promptly, or likely to default on the loan instead.
In India, the credit rating is denoted by a 3-digit number ranging from 300 to 900. Most banks and non-banking financial companies (NBFCs) consider credit scores of 750 or higher as good ratings. Now, the higher your credit score is, the more credit-worthy you are considered to be. And a high credit score makes it easier for you to avail loans, often at attractive rates of interest.
But who determines your credit score? And what makes it high or low? Let’s find out.
Who determines your credit ratings?
There are special credit information companies that determine the credit score of individuals in the country. Currently, we have 4 such companies that have the RBI’s approval to perform this function.
What are the factors that influence your credit score?
The credit information companies you saw in the previous section take many factors into account before deciding your credit rating. Take a look at the factors that affect your credit score.
1. Your repayment history
Credit information companies look into your repayment history and assess if you’ve been prompt with your payments. If you’ve generally been punctual with your debt or EMI payments, your credit ratings are likely to be higher. On the other hand, if you have failed to repay any of your earlier loans on time, that could negatively impact your credit score.
2. Your credit utilization ratio
This is simply the ratio of the credit you’ve used, to the total credit that’s available to you. The lower your credit utilization ratio, the better your credit score will be. Experts recommend using around 30% to 40% of your credit. However, if you have used most of your available credit, credit rating companies will regard you as a risky borrower.
3. The duration of your credit history
A longer credit history generally has a positive impact on your credit score. This means if you have never availed a loan and never used a credit card before, your credit score is likely to be low. That’s because in case of a short credit history or no credit history, credit information companies do not have much information to use and determine your credit score.
4. Your credit enquiries
Your credit ratings are also affected each time you make an enquiry about a loan or check out a new credit card offering. This is because you may come across as credit-hungry - a sign that most lenders look at as a red flag.
5. The credit mix in your name
Credit can be secured or unsecured. Borrowings like home loans, which require a collateral, are forms of secured credit. Your credit card or your personal loan, on the other hand, is unsecured. Having a healthy mix of credit products in your name also has a good impact on your credit score. Simply put, do not rely too much on just one type of credit.
How to view your credit rating?
You can view your credit rating using your credit report. Today, there are many websites that allow you to view your credit score or download your credit report free of charge. You only need to enter your basic personal details (like your name, mobile number, PAN, date of birth and email ID), verify your identity, and then view your credit information.
Summing up
A good credit score makes it easier for you to get loan approvals. It also allows you to enjoy more affordable rates of interest. That’s why it’s important to maintain a good credit rating. And doing that is quite simple. Mostly, you just need to repay all your dues on time. And keep your credit utilization ratio within an acceptable range.
[1]
https://www.homecredit.co.in/en/68-of%20borrowers-are-unaware-of-their-CIBIL-score-reveals-Home-Credit-Survey
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