What is a credit score?
A credit score is a three-digit number (300–900 in India) that summarizes borrowing and repayment history. Banks use it to decide whether to lend, and at what interest rate. It is a measure of creditworthiness.
CIBIL (Credit Information Bureau India Limited) is the primary agency issuing scores, though CRIF High Mark, Equifax, and Experian also score. Banks primarily use CIBIL.
The five components
Credit score calculations (CIBIL methodology) weight:
- •Payment history (35%): On-time vs late payments. A single 30-day late payment causes a 50–100 point drop.
- •Credit utilization (30%): How much credit you use vs available credit. If a credit card has ₹2,00,000 limit and ₹1,80,000 balance, utilization is 90% (bad). Utilization below 30% is ideal.
- •Credit mix (15%): Variety of credit types. Having a home loan, car loan, and credit card is better than credit cards only.
- •Credit age (10%): How long credit accounts have been open. Older is better; accounts open 5+ years contribute positively.
- •Inquiries (10%): Hard inquiries (loan/card applications) lower score temporarily. Multiple inquiries in short periods suggest desperation, raising lender suspicion.
Real example
Person A (Score: 750–800):
- •24 months of on-time payments on home loan, car loan, credit card
- •Credit card utilization: 15%
- •Credit age: 5+ years
- •No recent inquiries
Person B (Score: 600–650):
- •One late payment 8 months ago
- •Credit card utilization: 85%
- •Only credit cards (no mix)
- •Three hard inquiries in last 2 months
Person A receives approval for loans at 7.5% interest. Person B is denied or offered 12% interest.
How scores move
- •Improve: Consistent on-time payments (+5–10 points monthly); reducing card utilization (+20–50 points); aging accounts (+2–5 points annually)
- •Decline: Late payments (−50 to −150 points per incident); increasing utilization (−10–20 points); inquiries (−5 points each)
Recovery from damage takes time:
- •Late payment impact peaks immediately, then gradually fades
- •A 60-day late payment requires 12–18 months of good behavior to recover
- •A default remains visible for 5–7 years
Why it matters
A score above 750 typically qualifies for prime interest rates (lowest available). Scores below 650 face rejections or high rates. Because interest rates compound, the difference between 7.5% and 12% on a ₹20,00,000 home loan is ₹3,00,000+ over 20 years.
Investors who maintain on-time payment discipline and low credit utilization accumulate credit strength that translates to cheaper borrowing throughout their financial lives.