Credit score

A credit score is a number that sums up how you have borrowed and repaid money in the past. In India, it is a number between 300 and 900. A higher score tells a lender that you are more likely to repay a new loan. When most Indians say "credit score", they mean the CIBIL score.

Where does the number come from? Every bank and lender reports each customer's loans and credit cards to a credit bureau every month. The report says how much the person owes and whether they paid each EMI on time. The bureau keeps this record for every borrower. From it, the bureau calculates the score. Paying late, missing an EMI or using almost all of a credit card's limit lowers the score.

A lender uses the score when someone applies for a loan or a credit card. The lender asks the credit bureau for the applicant's credit report and score. A credit decision engine reads the score along with the applicant's income and bank statement. It then approves or declines the application and sets the interest rate. A higher score usually means a lower rate.

Take, for example, a person who has never taken a loan. Lenders call this a thin file, and alternative credit scoring can score such a person, with consent, from bills paid and money coming into the bank account.

Consider someone whose score fell after two missed credit card payments. A secured credit card, backed by a fixed deposit, lets them rebuild the score by paying every bill on time.

Imagine you want to know your score before you apply for a home loan. A credit score monitoring app shows it to you, and checking your own score does not lower it.

How is a credit score different from a credit rating? A credit score is for a person. For a company or a bond, the equivalent is a grade, such as AAA, from a credit rating agency. And the score is only one input: deciding the loan from the score and other data is called underwriting.