Financial inclusion is a key driver for the growth of the economy and plays a vital role in poverty alleviation, which compels the central bank to strategise financial inclusion in a fast and affordable manner, alongside deepening financial inclusion and promoting financial literacy and consumer protection.
However, negligence and ignorance during financial inclusion turn credits into non-performing assets and become burdens as bad loans on the country’s economy; hence, the importance of credit evaluation comes into the picture, and one of the pillars of credit evaluation is “Credit score”.
In today’s era, credit plays a vital role in shaping our financial lives or achieving organisational goals. Your credit score plays a pivotal role in determining your eligibility and financial reputation. This article explores why credit scores are so important and how to improve them.
In India Presently, there are four CICs, viz., Credit Information Bureau (India) Limited, Equifax Credit Information Services Private Limited, Experian Credit Information Company of India Private Limited, and CRIF High Mark Credit Information Services Private Limited, which have been granted Certificates of Registration by the RBI and are using the FICO® Score model to calculate credit scores. FICO® Score is a widely recognised credit scoring model developed by Fair Isaac Corporation, and it is commonly used by credit bureaus and lenders around the world, including in India as well.
These four CICs calculate the credit scores using various factors such as payment history, credit utilisation, length of credit history, types of credit used, and new credit applications, and concise all the information into a three-digit numeric number from 300 to 900 called the “credit score”.
The detailed credit history and financial activities compiled into a report provide information about the person’s borrowing and repayment behaviour, including credit accounts, payment history, credit inquiries, public records, and any reported delinquencies or defaults. This report is titled Credit Report, and it is made available to all banks and FIs to make informed decisions while lending and mitigate credit risk.
Hence, a bad credit score can have several significant disadvantages, including difficulty obtaining credit, higher interest rates, limited credit options, challenges in renting or leasing, higher insurance premiums, a potential impact on employment opportunities, and difficulties in securing business financing.
So, the importance of maintaining or improving a healthy credit score for an individual or a corporation is very critical and necessary nowadays, and there are mainly four factors that affect a credit score.
Payment history: Making late payments or defaulting on your EMIs or dues will negatively impact your score, so make your payments in a timely manner.An adequate blend of Secured and unsecured credit has a positive effect on the credit score.
A high current outstanding balance on your Credit cards, OD, or CC Accounts indicates an increased repayment burden and may negatively affect your score.Multiple inquiries will indicate a surge in debt burden, which leads to caution among lenders and negatively impacts the credit score.
Hence, it is important to manage credit responsibly, make timely payments, and take steps to improve creditworthiness and maintain a healthy financial profile to achieve credit facilities in a quick and affordable manner.
