What is Credit Score? Factors, Calculation & Ways to Improve

what is a credit score

If you’re thinking about applying for a loan or credit card, you may have heard about credit scores. But what exactly is a credit score, and why is it important? In this blog, we’ll take a closer look at credit scores, including what they are, how they’re calculated, and why they matter.

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What is a Credit Score?

A credit score is a three-digit number that represents your creditworthiness. It’s used by lenders, such as banks and credit card companies, to determine whether you’re a good candidate for a loan or credit card. Your credit score is based on several factors, including your payment history, credit utilization, length of credit history, and types of credit accounts.

Factors Affecting Your Credit Score

Your credit score is affected by several factors, including:

  • Payment history: Whether you’ve made your payments on time and in full
  • Number of your current loans
  • Credit Mix: This aspect involves the diversity of credit types you’re managing, like credit cards, personal loans, home loans, etc. A mix of different credit types can positively affect your credit score.
  • Recent credit inquiries: How many times you’ve applied for credit recently.

What is a Good Credit Score?

A good credit score is typically considered to be 650 or higher. However, this can vary depending on the lender and the type of credit you’re applying for. For example, some lenders may require a higher credit score for a mortgage than for a credit card.

Why Good Credit Scores Are Important

Having a good credit score can make it easier to get approved for loans and credit cards and can also help you get better interest rates and terms. On the other hand, a poor credit score can make it difficult to get approved for credit and can result in higher interest rates and fees.

Can I Improve My Credit Score?

Improving your credit score is like training for a marathon – it requires commitment, strategy, and time. Here’s how you can boost those numbers:

  • Pay Your Bills on Time: Consistency is key. Late payments can significantly dent your score, so set reminders or automate payments.
  • Keep Credit Card Balances Low: High balances relative to your credit limit can harm your score. Aim to keep your credit utilization below 30%.
  • Don’t Close Old Credit Cards: Older accounts lengthen your credit history, a vital factor in your score.
  • Limit New Credit Applications: Too many hard inquiries in a short time can signal risk to lenders.
  • Mix It Up: A healthy mix of credit types (credit cards, loans) can show you’re a well-rounded borrower.
  • Regularly Monitor Your Credit Score and Report: Stay informed and dispute any inaccuracies promptly.

As an Indian, having a good credit score is crucial for obtaining loans, credit cards, and other financial products. A good credit score shows that you are responsible with credit and are likely to repay your debts on time. However, many people struggle to improve their credit score. Here are:

Also, Read: Credit Score vs CIBIL Score: Are they Even Different?

4 Tips to Help you Improve Your Credit Score in India

1. Pay Your Bills on Time

One of the most important factors that affect your credit score is your payment history. Late payments, missed payments, and defaults can all have a negative impact on your credit score. To improve your credit score, it’s essential to pay your bills on time. This includes credit card payments, loan payments, and utility bills. Set up automatic payments or reminders to ensure that you never miss a payment.

2. Keep Your Credit Utilization Low

Credit utilization is the amount of credit you use compared to the amount of credit you have available. For example, if you have a credit card with a Rs. 50,000 limit and you have used Rs. 25,000, your credit utilization is 50%. A high credit utilization can negatively impact your credit score. To improve your credit score, keep your credit utilization low. Aim to use no more than 30% of your available credit.

3. Monitor Your Credit Report

Your credit report is a record of your credit history. It includes information about your credit accounts, payment history, and credit inquiries. It’s important to review your credit report regularly to ensure that the information is accurate. Errors in your credit report can negatively impact your credit score. You can obtain a free copy of your credit report once a year from each of the major credit bureaus in India.

4. Build a Credit History

If you have never taken out a loan or credit card, you may have a low or no credit score. To improve your credit score, you need to build a credit history. You can start by applying for a credit card or a small loan. Use the credit card or loan responsibly and make timely payments. Over time, your credit score will improve.

Also Read: Get a Personal Loan Without Credit Score – 5 Fool-Proof Ways

What is a Credit Report?

A credit report is like a detailed biography of your credit history. It’s a document compiled by credit bureaus that includes:

  • Personal Information: Your name, address, Social Security number, and sometimes employment information.
  • Credit Accounts: Details on credit cards, loans, balances, and payment history.
  • Credit Inquiries: A record of everyone who has accessed your credit report.
  • Public Records: Bankruptcies, foreclosures, or legal judgments, if any.

Why is a Credit Report Important?

Your credit report is the foundation of your credit score. Lenders use it to assess your creditworthiness for loans and credit cards. It’s also vital for detecting identity theft or errors that could hurt your credit score.

How to Access Your Credit Report

You’re entitled to a free credit report every 12 months from each of the 4 major credit bureaus – CRIF, Equifax, Experian, and CIBIL. Access them through the CIBIL website. If you want your credit report more often, like every month, there are fees. CRIF charges Rs 399 and Equifax charges Rs 472 for each extra report. For CIBIL, it’s Rs 550 for one month or Rs 1,200 for the whole year.

A credit report is a detailed record of your credit history, including your credit accounts, payment history, and credit inquiries. It’s used to calculate your credit score.

How is the Credit Score Calculated?

In India, credit scores are calculated based on several factors related to your credit history and behavior. These are typically evaluated by the four major credit bureaus (CIBIL, Experian, Equifax, and CRIF High Mark) using their own algorithms. However, the core factors influencing the credit score are generally similar across these bureaus:

1. Payment History (35-40%): This is the most significant factor. It reflects your consistency in paying off credit card bills and EMIs (Equated Monthly Installments) on time. Late payments, defaults, and settlements negatively impact your score.

2. Credit Utilization Ratio (20-30%): This is the proportion of your credit limit that you’re using. A lower credit utilization ratio is better. It’s recommended to keep it below 30% of your total credit limit.

3. Credit History Length (15-20%): A longer credit history provides more data about your borrowing behavior and can positively affect your score. It includes the age of your oldest credit account and the average age of all your accounts.

4. Type of Credit (10-15%): A mix of different types of credit (secured loans like home loans, unsecured loans like personal loans, and revolving credit like credit cards) is seen positively as it indicates your ability to manage different types of credit responsibly.

5. Number of Hard Inquiries (10-15%): Each time you apply for a loan or a credit card, the lender makes a ‘hard inquiry’ to check your credit report. Numerous inquiries in a short period can negatively impact your score, as it might indicate that you are credit-hungry.

6. Other Factors: These may include the number of active loans and credit cards, the amount of outstanding debt, and the frequency of applying for new credit.

Credit scores in India range from 300 to 900, with a score above 700 generally considered good, increasing your likelihood of loan approval and possibly securing better credit terms.

Remember, while the above percentages are indicative, each credit bureau may have its own specific algorithm, and the weightage of each factor might vary slightly. Regularly checking your credit report and maintaining good financial habits are key to improving and maintaining a good credit score.

Also Read: Get a Personal Loan for Salary of Rs. 12000

How can I Check my Credit Score Online?

There are several ways to check your credit score online. You can use a free credit score website, such as ours Credmudra, or you can purchase your credit score from one of the three major credit bureaus: Experian, Equifax, or TransUnion. It’s important to check your credit score regularly to ensure that there are no errors or fraudulent activity on your credit report.

To sum up, a credit score is an important part of your financial health. By understanding what a credit score is, how it’s calculated, and why it matters, you can take steps to improve your creditworthiness and increase your chances of getting approved for loans and credit cards. Remember to check your credit score regularly and to make your payments on time to maintain a good credit score.

Also Read: How to Get a Business Loan on Low Credit Score?


1. How often should I check my credit score?

It’s a good idea to check your credit score at least once a year, and more frequently if you’re planning to apply for credit.

2. Can my credit score decrease even if I always pay my bills on time?

Paying bills on time is crucial, but it’s not the only aspect affecting your credit score. Other factors, such as having a high total debt or recently acquiring new loans, can lower your score despite timely payments.

3. Will having no money in my bank account affect my credit score?

No, the balance in your bank account doesn’t influence your credit score. A zero balance won’t impact your score as long as you continue to make payments on time and manage your credit responsibly.

4. Does my income level play a role in determining my credit score?

Your income, including your salary, doesn’t directly influence your credit score. However, a change in income that affects your ability to pay your bills on time can indirectly affect your credit score.

5. Do debit card transactions have any effect on my credit score?

Debit cards are not linked to borrowing, so their usage doesn’t appear in your credit report and has no effect on your credit score.

Also, Read: 8 Best Ways to Improve Your CIBIL Score Quickly


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