What is a Credit Score? What is its Role in Loan Eligibility?

A credit score is generally defined as an expression of numerical value that is based on the credit file-level analysis of an individual. It is used to denote the creditworthiness of the individual. The score is based on a credit report sourced from credit bureaus.


The credit score describes a potential loan borrower’s or a credit card holder’s credit merit. These scores are calculated by institutions like -

·         CIBIL TransUnion

·         Equifax

·         Experian Credit Information Company

·         High Mark Credit Information Service

All these bureaus have their own algorithm that they utilize in computing the credit scores.

In addition to their own limits, the granting of a loan by a lender is majorly dependent on the score given by one of the above mentioned institutions. 


Credit scores help in understanding aspects like the following-

·         Credit and repayment history

·         Credit utilization

·         Previous debt tenures

The chance of a financial institution approving your loan is higher when your credit score is 750 or above. The highest score a person can have is 900.


What is its Role in Loan Eligibility?


A credit score depicts the credit merit of a person. For example, a student completes their bachelors and goes for an educational loan to continue their studies further. They do not have any previous loans on their name and have not taken any sort of credit. Then the credit score of the student would begin from zero.


The credit score plays a key role while applying for a loan. It is the first thing that banks consider before granting you a loan. To put it simply, it is the aspect on which the lender will form his first impression.

The higher your credit score, the better are the chances of your loan application being reviewed. However, it is to be noted that the lender has the final say regarding the loan sanction. There are many other reasons, other than your credit score, that can play a part in the loan rejection. Some of them are-

·         Job stability

·         Age of the applicant

·         Record of previous loans being rejected

·         Return filings of income tax

·         Unpaid payments


How is a Credit Score Calculated?


Credit scores are calculated after taking aspects like the following into consideration-

·         History of credit payment

·         Utilization of the credit

·         Credit age

·         Credit type

Let us how each of these aspects have an impact on your credit score-

Credit Payment History
This is one of the most important aspects while calculating your credit score. Your payment history has a huge impact on your credit merit. If you are consistent with your payments regarding credit cards or existing loans, you are seen as a responsible credit borrower.

When you prove your responsibility, you will be seen as eligible for favourable interest rates on loans. You will also be given quicker approval than those with credit payment dues.
When you miss payments or dues, your credit score would be affected.

The Ratio of Credit Utilization
Another aspect that has a big impact on your credit score is your credit utilization.

The ratio of your credit utilization is calculation of your total credit amount used in relationship with the accruing credit limit that is available. That is, it is calculated by dividing the total outstanding balance of credit by the total limit of the credit.
Experts comment that an ideal credit usage is 30% to 40% of the credit limit. Doing this can help in maintaining a high score of credit.

Credit Age
The age of your credit matters while calculating your credit score. It is always advised to have a long and responsible history of on-time due payments. This will allow the lender to analyse your loan profile more soundly.

Maintaining your current lines of credit is also important. Ensure that all your dues are paid in the given period of time.

Credit Type
The balance of both your secured credit and unsecured credit are looked into while calculating the credit score. An example of a secured loan is a home loan, while a credit card is an unsecured credit.

A combined credit with both the secured and unsecured types would help in boosting your credit score along with the above mentioned aspects. Borrowing huge amounts in a single credit type can have a negative impact on your credit score.

What is it Important to Maintain a Good Credit Score?


The following reasons are why a good credit score is important-

1.      It plays a crucial role in your loan approval process.

2.      It will make you eligible to avail credit cards with better benefits and rewards.

3.      Healthy credit score can help in getting a lower rate of interest over loans.

4.      It will help in applying for higher limits for your credit cards.

5.      It acts as an additional value to your visa application.


How Can We Maintain a Good Credit Score?

So far we have seen what a credit score is, the aspects included in its calculation, and its importance. Let us now see how we can maintain a good credit score.


1.      Ensure that you are paying all your EMIs and bills on time.

2.      Ensure that your payments do not cross the due dates.

3.      Ensure that you maintain a low ratio of credit utilization.

4.      Maintain good credit history for your old credit cards. 

5.      Try not to make various credit inquiries in the same time period.

6.      Avoid applying for multiple credit cards or loans in the same time period.

7.      Maintain a good credit mix of unsecured and secured credit types.

8.      Periodically review your credit report.

9.      Keep an eye on your credit score.

10.  Maintain a healthy and responsible relationship with the lending institutions.


How to Check Your Credit Score?


There are many free online tools available for checking your credit score.
Visit a selected credit score page and enter the required details. Details include your full name, mobile phone number, and email address. You will then receive an OTP to confirm your number. Few websites ask for age verification too. Once the verification process ends, you will get your credit score and credit report.


The Reserve Bank of India (RBI) has declared in 2017 that all the credit bureaus should offer one credit report per year. You can visit the official websites of such bureaus, like CIBIL, and get your credit score and credit report.



How is a credit score different from a credit report? 

A credit report includes the information regarding your present and past agreements of your credit holdings. It gives an idea of how much is owed to creditors over a time period. It also includes the history of payments and history.

A credit score, on the other hand, indicates the risk level of a borrower. It is also a part of the loan eligibility criteria. The credit score is determined by your credit report.


Would my credit score be affected by frequent inquiries?

A credit score inquiry will have no affect on your overall score. However, multiple loan applications might.


What does it indicate when my credit score reflects as NA and NH?

When your credit score reflects NA or NH, it usually means one of the following-

·         You do have ample credit history, i.e., you are beginning your credit and have no previous credit agreements.

·         There has been no credit activity in the previous two years or so.

·         Your report has no credit exposure with an all add-on credit card or cards.


Do multiple credit cards affect the credit score? 

Maintaining a good credit history by paying your dues on time will not have a negative impact on your credit score. However, if you have many credit cards and use them over or under the card limit will have an impact on your credit score.



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