Applying for a loan, requesting a credit report? Here's how your credit score is calculated in India

Credit score is a three-digit number from 300-900 that showcases your credit risk to lenders. It is determined by your past credit behaviour or “financial reputation” and is used to demonstrate that you are financially responsible. Here, the higher your score, the better your creditworthiness, while a lower score conveys more risks and less reliability.

Notably, your credit score is not fixed and can be improved upon gradually over a period of six months to a year by following responsible fiscal patterns. This includes repaying a personal or secured loan without missing due dates, timely repayment of EMIs, bills, subscriptions, and credit card debt. The goal is to showcase responsible fiscal behaviour through repayment of various financial obligations.

How is your credit score calculated?

Credit score is calculated by four prominent credit bureaus regulated by the central bank of India i.e. RBI — CIBIL, CRIF High Mark, Equifax and Experian, also known as Credit Information Companies (CICs), which gather your credit data and generate a report for banks and other lenders.

Notably, each CIC has their scoring model, and while scores can differ slightly between each, the overall credit health such be consistent no matter which bureau you choose. The following factors are of importance when credit bureaus calculate your scores:

• If you consistently repay bills on time. This helps outline your repayment history and credit discipline, showing how reliably you have handled past credit and repayment timelines.
• Weight of your current credit bill compared to overall eligibility. This is an indicator of your fiscal strength through an assessment of your investments, personal assets (i.e. gold, etc.) and savings.
• How many credit lines you have active, and your repayment time for each. This metric measures your ability to repay based on income, employment stability, and existing financial commitments without falling into further debt.

• Which type of credit lines you have active, i.e. credit card, home loan, personal loan, secured or unsecured loans. This is the assets that you have that can be pledged to secure a loan and de-risk the lender.
• Your credit activity — latest application, how many active concurrently, etc. This examines the purpose of your loan application and the financial conditions that could impact repayment on your part. A part of this is the conditions that define how the loan will be repaid and resolved in case of any dispute.

What are key factors to boost credit score?

• Ensure timely repayment of personal loan EMIs and credit card bills.
• Ensure no personal loan defaults or settlements, such a history can stay on your credit profile for years.
• Maintaining credit utilisation generally below 30% is recommended.
• Avoid reckless and continuous use of credit cards to the maximum limit.

• Keep track of multiple active personal loans, credit cards, and home loans.
• Borrowing within means and keeping spending in check is also an essential constituent.
• A healthy combination of secured, i.e., home and auto, and unsecured, i.e., personal loans and credit cards, provides a borrower with a healthy credit mix.
• The length of credit history is important, as older accounts offer stability. For example, a decade-old credit card with no past defaults can help immensely in boosting one’s credit history.

• Frequency of hard inquiries, i.e., applications for new personal loans or credit cards, damages credit scores and complicates future borrowing potential.

How can I access my credit report?

Prominent credit bureaus such as Equifax, Experian, TransUnion CIBIL and CRIF High Mark provide credit reports and calculate your credit score, to determine your creditworthiness and repayment ability for lenders.

As per regulatory requirements, you are entitled to one free credit report each year. You can access this to monitor and review your credit score.

Disclaimer: This story is for educational purposes only. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before making any credit or investment decisions.