What is Credit Score?


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What is Credit Score?

  1. 1. What is Credit Score? “ Strengthening your creditability“ RectifyCredit Knowledge Series
  2. 2. What is Credit Bureau? <ul><li>A credit bureau is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. </li></ul><ul><li>Credit Bureaus keep comprehensive credit information, which provides details pertaining to credit facilities already availed of by a borrower as well as his payment track record. </li></ul><ul><li>It is an organization providing information on individuals borrowing and bill paying habits. This helps lenders assess credit worthiness, the ability to pay back a loan, and can affect the interest rate and other terms of a loan. </li></ul>
  3. 3. What is Credit Score? <ul><li>The credit score is a three-digit number that is used to predict how you will pay your bills. The score ranges from 300 to 900 and is calculated using your credit history information from the CIR (Credit Information Report). The credit score is the measure that is most commonly used by lenders to determine the risk involved in a particular loan. Due to the proprietary nature of score, the bureaus do not reveal the exact formula they use to compute the score. However, it is commonly acknowledged that the calculation is based on five major parameters i.e. payment history, utilization of credit limit, enquiries, type of credit and new credit facilities. The more problems you have in your credit history, the weaker your credit score will be. </li></ul>
  4. 4. What is Credit Score? <ul><li>Credit score is a result of complicated statistical analysis of the information that is available in your credit report. All the information used to create your credit score is drawn from your credit report. </li></ul><ul><li>There are several variables that go into creating your standard score like past payment history, balance outstanding, credit account status, age of accounts etc. </li></ul><ul><li>Individual lending or credit-granting institutions use the credit score for decision making based on their credit policy. </li></ul>
  5. 5. What is Credit Score? <ul><li>Credit score is based on your past financial responsibilities and past payments and credit, and it provides potential lenders with a quick snapshot of your current financial state and past repayment habits. </li></ul><ul><li>Your credit score reveals to lenders about how much of credit risk you are for him if he lends money to you. </li></ul><ul><li>Based on the credit score, lenders decide whether to trust you financially - and give you better rates when you apply for a loan. </li></ul><ul><li>Credit score: the Higher the Better! On the scale of 0 to 1000, any score above 500 should be good enough to get due attention of any lender on your credit application. </li></ul>
  6. 6. Segregation by credit score 500 600 700 800 800+
  7. 7. Decoding the Bureau Score <ul><li>1. Late payments or defaults in the recent past: </li></ul><ul><li>Your payment history has a significant impact on your score. The payment history category reviews how well you have met your prior obligations on various account types. It also looks for previous problems in your payment history such as delinquency or bankruptcy. Hence, if you have missed payments on any of your existing loans, over the last couple of years, your Score is likely to be negatively affected because it indicates that you are having trouble servicing your existing obligations. </li></ul>
  8. 8. Decoding the Bureau Score <ul><li>2. High Utilization of Credit Limits: </li></ul><ul><li>The next largest component is the amount that you currently owe to lenders. While this category focuses on your current amount of debt, it also looks at the number of different accounts and the specific types of accounts that you hold. So if you are overleveraged, it will have an adverse effect on your score. While the balances on your loans will only reduce over time as payments are made, you must be diligent about making timely payments on your credit cards. It’s prudent to not use too much credit. </li></ul>
  9. 9. Decoding the Bureau Score <ul><li>3. Higher percentage of Credit Cards or Personal Loans (commonly known as Unsecured Loans) on your CIR: </li></ul><ul><li>A higher concentration of home loans or auto loans (commonly known as Secured Loans) is likely to be more favorable for your Score than a large number of unsecured loans. Although unsecured loans offer easy access to finance, it’s also by far the most expensive forms of credit. More the number of unsecured loans with high utilization, larger are the payments resulting from its high rate of interest. </li></ul>
  10. 10. Decoding the Bureau Score <ul><li>Behaving “Credit Hungry”: </li></ul><ul><li>Multiple enquiries or requests of loans will hurt your credit scores. As people who apply for credit a lot probably already have financial pressures causing them to do so. More types of credit accounts you have, the lower your score will be. While inquiries can remain on your credit report for two years, your credit score calculation only considers those made within a year. </li></ul>
  11. 11. Thank You!!! For more information please visit www.rectifycredit.com