Beyond the number: What does your credit score really say about you?

Credit score: If you want to borrow money from a lender, one of the first things the lender would do is to check your credit score. For the uninitiated, a credit score is a three-digit number that summarises repayment history, credit mix, credit age, outstanding balances, and recent enquiries.

Despite its importance, over 400 million adults have no credit history at all. That's nearly one in two adults without a financial identity, according to a TransUnion CIBIL 2022 study.

ZET recently released a report, ‘State of credit score awareness in India', which states that loan rejection is often silent and confusion around credit scores means users are being denied without knowing why.

Rejected for a loan

When asked if they had ever been rejected for a loan or credit card due to their credit score, 30 percent of respondents said ‘yes’ and 70 percent said 'no' -- the report notes.

“If people don’t know why they were denied, they won’t know how to fix it. Rejection without education turns first-time users away from formal credit and pushes them toward unregulated options, which may have severe consequences,” reads the report.

“Around 1.6 per cent more than the best rates available. On paper, the difference looked small. But for a ₹35 lakh home loan over 20 years, that 1.6 per cent added over ₹8.5 lakh in extra payments. What seemed like a minor compromise at the start became a burden that stretched across two decades,” reads the report.

It is not enough 

There is a misconception that paying credit card bills on time is sufficient to maintain a good credit score. Whereas most people overlook other key factors, such as maintaining a healthy credit mix and keeping credit utilisation low.

High utilisation can lead to a lower credit score. Likewise, users tend to underestimate the impact of multiple hard enquiries in a short period, which can signal credit-hungry behaviour to lenders.

Another misunderstood thing is to close old accounts. Most people believe it is responsible behaviour, whereas older accounts contribute positively to credit age, a key factor in credit score calculation, the report notes.

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 score. 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.