What goes into the making of a credit score?

What goes into the making of a credit score and how to manage your credit score to derive maximum benefit for accessing credit and developing vital reputational collateral? This article tries to elaborate on these areas.

Since the growth of the credit information industry, the only implemented generic scoring model that has been introduced and is being used by lenders in India is the Cibil TransUnion Score. Through advanced analytics this score assigns a number from 300 to 900 to a borrower based on his credit history. The higher the numerical value of the score the lower is the credit risk associated with the individual. You may now wonder how is the credit score calculated?

In simple terms, there are various attributes that go into developing the score. Though many are proprietary in nature, majority of the score is made up of the following factors:

Credit utilisation: How much credit is the consumer using?

Defaulting: How many accounts are past due — how much and by how many days?

Number of inquiries: Has the consumer applied for additional credit lines?

Trade attributes: How old are this consumer’s lines of credit?  What type of credit does he have? Does the consumer have a good mix or balance of credit or is it all credit cards?

Now we know the broad factors that determine the credit score, it is also imperative to understand how to manage your credit score? Here are some ways to make sure that you maintain a healthy credit score: • Pay your loan EMIs on time. When you have more than one loan running, it gets difficult to repay them or keep a track of them. So, make regular and timely repayments of your loan to maintain your credit level.

Never fail to pay the minimum payment on your credit card. It is advisable to make full payments on your credit card every time. Credit card is categorised as revolving credit and it helps in building a good credit score if payments are regular.

Do not apply for loans or credit cards if not required as this would mean more credit exposure. This could affect your credit score. Instead of applying for another loan, try checking for a top-up loan option. This will make your debt burden easier to manage.

Use some of your savings to repay part of your debt. Always plough back extra income to reduce your debts. This will increase your credit score level.

Avoid going in for settlements. Although you make payments for your purchases, in a settlement case, it would bring down your score level. And never get into a write-off scenario. This means not paying your dues at all.

Review your credit history and credit score frequently, throughout the year.

For maintaining a good history and subsequently a worthy credit score you should ensure that you are always in control of your finances. Remember, a good credit history results in speedier access to credit. It is beneficial to both the credit grantor as well as the credit borrower. However, if your credit score is low, don’t be disheartened. The credit system always gives scope for improvement. You can start improving your credit score by simply paying off your debt and not opting for more credit until your score improves….Better late than never!

The writer is senior vice-president - consumer relations, Cibil, and can be reached at creditwise@cibil.com