When a person applies for a loan, be it a personal loan, home loan, business loan, or any type of loan, the money lending institution always checks for the credit score, precisely a good credit score. A good credit score lies between 300 and 900; whereas, ‘900’ is the highest score possible. The bank or any other loan-giving institution checks for credit score and demands it to be above 300. If you fail to maintain the score, unfortunately, you are denied the loan.

What is a Credit Score?

Credit score can be defined as your creditworthiness. It is termed as one of the crucial parameters for lending money by government or private lending entities. When a person applies for a loan from any private or government lending entities, they individually evaluate your credit score for decision making. In this way, they decide about you being a potential lender or a potential defaulter.

What is a Good Credit Score?

A credit score is your creditworthiness, whereas a good credit score adds different parameters to your creditworthiness. Be that as it may, if your three-digit credit score is above 300 and goes somewhere up to 900, then you can be a potential borrower.

No money lending institution will deny your loan because you are not a potential defaulter. However, the story manifolds from this point onwards because only having a good credit score is not enough. Moreover, having a high credit score is generally required.

There is an institution TransUnion CIBIL that evaluates your credit score depending upon your previous transactions. It is one of the deemed bureaus out of 4 bureaus working in India, and others are Equifax, CRIF High Mark, and Experian.

Depiction of a Good Credit Score

This is a crucial part of the money lending process because the slightest error can increase the risk of lending money to a higher-risk borrower. Therefore, all of the money lending institutions follow set criteria for a good credit score.

The table mentioned below will help you to understand it better.

Credit Score	Remark
Below 580	Poor
580 to 669	Fair
670 to 739	Good
740 to 799	Very Good
800 and above	Excellent

 So, as per the above table, you can see the categorization of four credit score limits.

• Below 580: People having a credit score below 580 are poor borrowers. They don’t get loans very easily.
• 580 to 669: Borrowers with a credit score between 580 and 669 are termed as Subprime Borrowers. They have to face a lot of rejection while qualifying for a loan. Even if they qualify for the loan, they don’t get the desired amount and interest rate.
• 670 to 739: People with a credit score between 670 and 739 are considered a good borrower. They don’t find it that difficult to get a loan. However, they still have to depend on bank or money lending institutions for loan terms and the principal amount.
• 740 to 799: People with a credit score between 740 and 799 are very good borrowers with fewer risks. They get loans very easily without any discrepancies.
• 800 and above: Having a credit score 800 or above is a sign of excellence in the banking and money lending sectors. This score shows you best and responsible credit behavior towards money lending institutions. One of the top banking institutions takes this credit score as a potential borrower with favorable loan terms.

Note: Different lenders have different money lending criteria, which may also include your source of income, amount of monthly income, steady account transaction, ITR, etc. Also, the credit scores and their consideration criteria may differ between the major bureaus for credits. However, the above depiction is closest to all.

Therefore, you must research different credit models before applying for a loan.

Computation Process of Your Credit Score

Your credit score’s computation process involves 4 factors, Credit Mix, Past Transaction, High Credit Utilization, and Multiple Loan Queries.

• Credit Mix – Checking whether or not you have equally availed secured and unsecured loans.
• Past Transaction – Whether or not there are any delayed or missed EMIs.
• High Credit Utilization – Checking if your debt has increased over time or decreased.
• Multiple Loan Queries – Summarizing all loan inquiries you have made till now.

If you go by numbers, your transaction history or past payments contribute 30% of the score. Therefore, the EMIs should be timely paid and never missed. Further, your credit mix contributes 10% of the overall credit score, and hence, you should always balance your unsecured loan with a secured loan.

Other factors that contribute to the credit scores are the utilization of your credit limit (30%), multiple loan inquiries (15%), and repayment tenure of loan (15%).

Tips for Building a Good Credit Score

It takes a lot of time, patience, and good habits to build a good credit score. Therefore, here are a few activities which you should religiously practice to have a good credit score.

1. Pay your credit card dues and EMIs on time
2. Stay away from taking multiple loans at a time
3. Don’t inquire for a loan until it’s needed badly
4. Maintain your credit utilization ratio within 30%
5. Keep a close look at your CIBIL report
6. Don’t settle or change your loans
7. Cancel dormant credit card
8. If once not approved, don’t apply for any loan or credit cards
9. Always keep your loan tenure lengthy
10. If it is possible for you, then do prepayments
11. Always set reminders for credit card payments and upcoming EMIs
12. Always maintain a balance between secured and unsecured loans

Conclusion:

Loans are always for the needy. Therefore, keep your backup ready by having a good credit score and borrowing history. If you really wish to go untouched by bad loans and failed credit history, always go by financial goals as planned.

But, if it is already too late to understand, then start working towards the betterment of your credit score. Good practices will pay someday, definitely!!

Author Bio: Surya Patra is a qualified webmaster by profession and Marathon Runner/Cyclist by passion with more than 6+ years of expertise in the financial domain. Surya is also an entrepreneur, enthusiastic in storytelling, content writing, and digital marketing professional.