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What is Credit score? Why is credit score Important?

Layman Series – Credit Score: Meaning and Importance


Credit score is a numerical representation of your creditworthiness. It is determined based on your credit files – loans, debts, bills, repayments, missed payments, number of loans and credit cards in your name and such other factors. Available in a three-digit score, it is a record of your credit history. The minimum you score on the report is 300 points and the maximum is 900. A score above 750 points is considered to be very good and puts you in the low risk bracket when you apply for a loan. While it is a permanent record of all your monetary transactions, the score need not remain constant. You can work towards achieving a better score and maintain it, since a lot of your significant life choices depend on it.

Companies licensed by the Reserve Bank of India (RBI), such as the Credit Information Bureau (India) Limited (CIBIL), Experian, High Mark, etc. have the authority to evaluate and report your credit score. Assessing your credit score is not limited to banks and financial institutes. Every entity that provides loan assesses your credit score. With a variety of companies offering goods payable via EMI, it has become a rule.

Importance of a Good Credit Score

  1. Your eligibility for getting a loan increases

A high credit score rating indicates that you are a low risk borrower. A score above 750 assures the lenders that you would repay on time. This makes it easy for you to get loans. A good score always comes in handy when you want to take home loans, personal loans, business loans, etc.

  1. You get lower rate of interest which reduces your EMI

With a good credit score you are not only easily approved for a loan, but you also get a lower rate of interest. This is turn reduces the total amount payable towards the loan and also lowers EMI. A lower EMI means lesser monthly financial burden.

  1. It takes a long time to improve a bad score

A single missed payment or even a delayed payment can significantly bring down your credit score. Thus, a small mistake could cost you big in the form of a higher rate of interest and difficulty in getting a loan. While, there are ways for you to improve your credit score, it takes a long time, impacting your monetary transactions for a long time.

  1. Credit records are permanent

Your credit records are permanent. So, even if you managed to slowly improve your credit score, your records will show past missed or defaulted payments, and, in extreme cases.

Ways to Improve your Credit Score

  1. Make sure you pay all your bills on time. Arrange for a direct debit so you don’t miss payments.
  2. Prevent credit card debt by avoiding maxing out.
  3. Understand the importance of credit score and learn ways to build it positively. For instance, using a credit card responsibly.
  4. Don’t take too many loans or credit at one time.
  5. Take charge of your credit history. Monitor your score once a year and rectify any glitches immediately. A good score over a long period of time is always better than a good score for a shorter period of time.
  6. Do not extend your loan tenure.

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