Think you know credit scores? These 9 facts will surprise you

When you apply for a loan or credit card, your credit score plays an important role in determining whether the bank approves or denies your application. While most people know this fact, there are many interesting facts about credit score that you may not know. So let’s understand these facts and why you should know about them.

Application or rejection of a loan: In addition to the credit score, other factors also play a role

While a good credit score is an important criterion for a loan or credit card application, it is not the only one. The applicant’s age, income, debt-to-income ratio (DTI), occupation, career stability, place of residence, etc. also play an important role in the bank’s decision.

Banks specify the minimum and maximum age range, minimum monthly salary or annual income tax return (ITR), minimum months/years with the current employer, etc. A DTI up to 35% is considered good. Some banks consider a DTI in the range of 36 to 49%. Some banks consider certain professions riskier than others, and some banks operate in a limited number of cities and only consider loan/credit card applications from residents of those cities.

No loan or credit card equals no credit score

To build and maintain a good credit score, you will need to take advantage of a loan or use a credit card regularly. You cannot achieve a high credit score without using credit tools. Based on their personal experience, some people will tell you that debt is bad and that you should stay away from it.

However, to build or maintain a high credit score without the need for a loan, you can use credit cards. Use the credit card for your normal monthly expenses and pay the monthly bill on or before the due date. Following this process will help you build and maintain a good credit score.

Your income has nothing to do with your credit score

Your income plays no role in calculating your credit score. So no matter how high your income is, it will not affect your credit score. Whether your income increases, decreases, or stops due to job loss, it will have no effect on your credit score.

A high credit score can get you better loan terms

Banks consider a credit score of 750 or higher as good for approving a loan or credit card application, provided the other eligibility criteria are met. The higher the credit score, the better. Some banks offer better loan terms to individuals with higher credit scores. These may include a lower interest rate compared to others, a higher loan amount or longer term, a discount or waiver of processing fees, etc.

So if you have a higher credit score, you can use it to negotiate better terms with the bank for your loan application.

Credit score calculation involves more components than just on-time repayment

Yes, timely repayment of monthly credit card bills and loan EMIs is important and has the highest weightage in credit score calculation. However, other components such as the credit utilization ratio, the mix of secured and unsecured credits, the aging of loans/credit cards, the frequency of credit applications, etc. also contribute to the calculation of the credit score.

A credit utilization ratio of 30% or lower contributes positively to increasing your credit score. Having a healthy mix of secured (home loans, car loans, etc.) and unsecured (personal loans, credit cards, etc.) loans helps increase credit score. Loan/credit card aging matters, the longer the term of the loan or the older the credit card, the better for your credit score. Submitting too many loan/credit card applications too quickly will negatively impact your credit score.

CIBIL is not the only credit bureau that issues a credit score

While most of us are familiar with CIBIL, did you know that there are three more RBI-registered Credit Information Companies (CICs)? The four CICs that provide and maintain credit scores are:

1. Credit Information Bureau (India) Limited (CIBIL)
2. Equifax Credit Information Services Private Limited
3. Experian Credit Information Company of India Private Limited
4. CRIF High Mark Credit Information Services Private Limited

All the above four CICs provide and maintain a three-digit credit score. Each has its own algorithm to calculate credit score. Therefore, the same person can have different credit scores across all four CICs despite having the same loans and credit cards.

Checking your own credit score multiple times will not affect this

You can check your own credit score an unlimited number of times. Checking this repeatedly will not affect your credit score in any way. The credit score is only affected when a bank or NBFC makes a difficult inquiry to access your credit score and history to decide your credit application.

Your credit score calculation does not take into account your investments

Your credit score only takes into account your credit instruments such as loans and credit cards. Your investments do not affect your credit score in any way. So whether you make new investments, continue existing investments, pause existing ones, redeem them, etc., none of these actions will impact your credit score.

A credit bureau does not edit or delete your credit information itself

A credit bureau such as CIBIL keeps track of your credit information. The basis of this information is the data that the CIC gets from the banks, NBFCs, etc., from whom you have taken loans or credit cards. The data related to your credit applications, payment of EMIs for loans or credit card bills, taking out of loans/cards, etc., is communicated by banks/NBFCs to the CICs. The CICs feed the data into their algorithm and generate the credit score.

A CIC does not add, edit or remove information from your credit report itself.

Make informed financial decisions to build and maintain a good credit score

There are many facts about credit score that individuals are not aware of. Not being aware of these facts can sometimes lead to certain misconceptions or myths about credit score. In this article, we have discussed some important facts that you may need to know about your credit score. It will help you clear the air and avoid misunderstandings or developing myths. Understanding factors that may or may not affect your credit score can help you make informed financial decisions to build and maintain a good credit score.

Gopal Gidwani is a freelance personal finance content writer with over 15 years of experience. He can be reached at LinkedIn.