A Healthy Financial Habit: Understanding Credit Score

Credit Information Bureau (India) Ltd (CIBIL), or credit score, remains a parameter to assess the creditworthiness of an individual. It remains the most popular of the four Reserve Bank of India (RBI)-approved credit bureaus, which include Experian, Equifax and HighMark.

The CIBIL score is a three-digit number measured between 300 and 900. Credit information companies in India calculate this number. These scores are based on an individual’s credit history which can range from loan repayment history to credit card repayment track record. 

Generally, a CIBIL score of 750 and above is regarded as an excellent score, while a score between 650 and 750 is deemed average and anything below 650 is a poor score. 

Typically, the credit utilisation ratio is considered by credit bureaus to calculate the credit score. It is the ratio of the total credit-card balances and total credit limit. If the utilisation is on the higher side, it will have a negative impact on credit score. This, even when balances are paid on time. The ideal credit utilisation ratio ranges between 35-40%. 

A credit score falls slightly every time an individual applies for a new loan. Then, if a borrower misses paying a loan equated monthly instalment (EMI). The credit score will go in the negative.

On the other hand, even when an existing credit card, which has been used for a long duration, is closed, tends to influence the credit score. 

A healthy financial habit to maintain an excellent credit score is to pre-pay the debts before the loan term finishes. Apart from this, it would also save money on potential monthly interest. Also, avoid using the credit limit to the maximum.

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