As Tyler Gregory said, “If you don’t take good care of your credit, then your credit won’t take good care of you.”
The quote holds for both individuals and businesses alike. Credit score or CIBIL score is the one thing, in the financial world, that always keep the holder on their toes. It is so because credit score is responsible for determining their credit-worthiness in front of banks, NBFCs, and other financial institutions. In other words, you need to maintain your credit score if you want to avail easy business loans.
But what is this credit score and why everyone seems to be so concerned about it?
A credit score, often synonymously called ‘CIBIL score,’ is a 3-digit numeric expression that represents the creditworthiness of an individual or business. The credit score is primarily based on the credit reports, telling the credit history of the concerned party. Lenders, such as banks, credit card companies, and NBFCs analyse this credit score to evaluate the potential risk factor involved in bad debt by lending money.
In other words, with a credit score, such financial institutions can determine whether or not an individual/business will repay their debts. The credit score ranges between 300 and 900. A higher score implies that you have a good credit score for loan approval. Therefore, the closer to 900 it reaches, the better financial health you have and vice-a-versa.
As stated above, the credit score is important because it showcases the financial dependability of the borrower. Therefore, with credit score, the lender can determine how eligible you are for a loan, what loan amount you’ll be offered, and the rate of interest that you’ll be charged.
Nevertheless, several NBFCs have their own way of determining the creditworthiness, yet the quintessential factor remains to be a good score for loan approval.
Decoding Credit Score
Now that we know that the credit score ranges between 300 and 900, let’s understand the breakdown of the credit score levels.
- Excellent Credit Score (above 800): If your credit score happens to fall under this range, congratulations! Because you or your business is considered to be highly responsible – well financially. You’re entitled to easy business loans with the lowest interest rates from banks and NBFCs. There is little or no history of late payments in your credit history.
- Good Credit Score (700-800): If your credit score ranges between 700 and 800, you’re in good shape. Your overall credit history says that you repay your debts on time. You might have missed a payment or two, yet the bank considers this a good credit score for easy loan approval.
- Average Credit Score (500-700): You are an average credit score holder if your credit score falls anywhere between 500 and 700. If you want to get any easy business loans, you’ll have to work on your credit report first. Luckily it can be done within a couple of months by following the best credit practices.
- Poor Credit Score (below 500): The credit score below 500 implies that you have missed several payment deadlines. Any banks or NBFCs are likely to reject your loan request right away, or they will lend you credit at a pretty high rate of interest than usual.
What is a Good Credit Score to:
- Avail a personal loan: If you’re looking to avail a personal loan, the minimum CIBIL score should be 700 or 750. This score is considered to be a good CIBIL score to avail loan.
- Avail a business loan: Those who are planning to apply for a small business loan (for SME or MSME), keep in mind that you need a credit score of 700 and above to apply for an easy business loan.
- Avail Home Loan: Since for home loan, lenders have the option of seizing your home if you default, a credit score of 650 and above are considered suitable for a start. Though, keeping a higher score can get you more considerable amount at very nominal interest.
How to Compute the Credit Score?
You might have come across difference in your credit score, calculated by different credit bureaus. That is because – every credit bureau has a unique algorithm to compute credit score. But the primary factor that affects your credit score is your credit history. The credit score is calculated, taking into account the following factors.
- Credit History: Your credit history contributes to 35% of the score. This depends on how well you’ll be able to manage repayment of your debts. Owing to its high weight-age, if you want to have a good credit score for loan approval, stress over maintaining a good repayment history.
- Credit Balance & Utilisation: This showcases the total credit available to you and how much of it you have used. It contributes to 30% of the score. You need to maintain a good credit utilisation ratio, i.e., 30%. This means to use only 30% of the credit sanctioned to you. Otherwise, you will be considered a risky borrower.
- Duration of availing Loan: It refers to the payment tenor and timely repayment of the credit within that tenor. This factor determines 15% of your credit report. Hence, if you have a loan of long repayment tenor and have responsibly repaid it entirely, your score will have a positive impact on your credit history.
- Credits: Every time you inquire about new credits, your credit history is affected. Yes, that too by 15%! An enquiry might refer to small business loans you wish to take or new credit cards you want to apply for. So, whenever you think about inquiring for new credits, remember that too much credit-inquiry will make you look as if you’re credit-hungry, in the eyes of the lender.
- Credit Mix: Credit mix contributes to 10% of the credit score. Therefore, make sure you are practising to maintain a healthy mix of secured and unsecured loans as well as short-term and long-term loans if you want to achieve a good credit score.