Credit scores in India explained: What they mean and how to improve yours

As financial institutions focus on tightening credit norms amidst fluctuating interest rate regimes, clearly understanding credit scores and the significance of a strong credit profile has now become essential for individuals seeking personal loans, credit cards or other credit instruments.

To put it simply, a credit score is a three digit number that reflects a borrower's creditworthiness and it is increasingly becoming a decisive factor in the lending process in the country.

As per the Reserve Bank of India (RBI) credit information organisations such as CIBIL, Experian, CRIF High Mark and Equifax assign scores in the range of 300 to 900. A score of 750 or 750+ is considered as a fairly good credit score. These scores are then used by banks, NBFCs and other lending institutions to assess the creditworthiness and the risk of lending to a customer.

What affects your credit score?

A credit score is generally calculated based on an individual's credit history, creditworthiness, repayment behaviors, credit mix along with existing liabilities. Maintaining a low credit utilisation ratio, on time payments of EMIs and having a sensible mix of unsecured and secure loans are some simple ideas that influence an individual's credit score positively.

Key factors that influence your credit score

As per recent guidelines, credit institutions must report consumer credit data to credit bureaus every 15 days. Due to the same, even a single missed EMI can dent one’s credit profile and the overall credit score, potentially affecting the ability to secure future loans.

How to check and improve your score?

Borrowers can access one free credit report annually from each bureau. This can be done through their respective official websites such as CIBIL, CRIF High Mark or Experian India. Do keep in mind that regular monitoring helps identify inaccuracies or fraudulent activity early.

Further, if your credit score is low, simple steps such as repaying overdue loans, avoiding multiple credit inquiries, avoiding a lot of leverage and reducing outstanding balances can gradually rebuild creditworthiness. The entire rebuilding process will take about six to twelve months but if you follow these steps diligently, then your credit score will definitely improve.

Key facts to remember

• Credit scores range from 300 to 900; 750+ is generally preferred by lenders.
• RBI mandates reporting of credit activity by lenders every 15 days.
• Free annual credit reports are available from all licensed bureaus.
• Missed EMIs, high debt and high credit utilisation can lower your score.
• Working on improving credit behaviour can significantly boost scores.

As the nation's formal credit economy expands and grows, credit scores are increasingly turning into financial passports for salaried individuals, self employed professionals and even MSMEs.

RBI on its part is also making commendable efforts to strengthen credit discipline and foster responsible lending. Due to all these developments it is sensible to maintain a healthy credit score primarily to navigate today’s ever evolving financial landscape efficiently.

Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit scores. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.