Most people are unaware of credit score and come to know about it after they fail to get a loan. So what is a credit score? Banks give credit card or loan––home, auto, and personal loans–– based on the ability of borrowers to repay the amount. They measure the repayment ability or credit worthiness based on credit score. If you have a higher credit score, it will help you get loans on better terms and lower interest rate.
Before applying for a loan, one should approach RBI approved credit information companies like CIBIL, Experian or Equifax. When you apply for a loan or a credit card, the bank forwards your application to any of these companies before approving loan or credit card.

The credit score is based on your repayment history, amount of credit on loans being used, number of loan applications, and the amount of secured and unsecured loans. Secured loans include auto and home loans while credit on cards constitutes unsecured loans. If your basket of loans has higher secured loans, there are better chances of getting loan as lenders see you as a reliable borrower. Frequent foreclosure of loans and application of new loans can also bring down your credit score as bankers suspect that you may be using the money for speculative investment or for buying stocks. Credit scoring is not limited to banks. Mobile phone companies, insurance companies, landlords, and government departments employ the same techniques.

A credit information company computes credit score, which is a three-digit number within the range of 300 and 900. Higher the score more the chances of getting a loan on favorable interest rates. A good score alone does not mean a person can get the loan he wants. Bankers also look at the status of previous loans and the payment history on such loans. A previously settled or a written off loan is likely to impair the ability to avail more loans.

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