Credibility is about how worthy you as when using credit. If the lender believes that you as a borrower will respect debt obligations, you may be considered credible. For you as a borrower to assess your credibility, could be an extremely challenging way and can lead to interest conflict with the lender. Hence, most credit bureaus tend to evaluate your credibility and linked credit risk of repayment to assist lenders in deciding whether to lend to you, the borrower. Most lenders ensure to consider your CIBIL score. CIBIL full form is Credit Information Bureau (India) Limited and the CIBIL score calculation is performed on analysis of your behaviour with credit.
There are several misconceptions linked with credit score and credibility. People often think it is tough to validate and apply such misconceptions to real-life scenarios. Here, demystified is the fact that scores mostly have nothing linked with your credibility with proper reasons.
What is credibility?
Creditworthiness is generally measured through credit score. This range anywhere from 300 to 900. It is an evaluation of the likelihood of the repayment behaviour of the borrower. Four important Indian credit agencies are CIBIL, CRIF Highmark, Equifax and Experian.
Usually, a higher score is looked upon as better by the lenders. However, credit scores might be distinct throughout distinct credit bureaus as each comes with its own set of score computation methodologies. All the bureaus are required to offer you as a borrower at least 1 free report each year. While the score is often used by lenders to decide your repayment potential, it does not necessarily determine your credibility. This is because you as a borrower might be capable of making loan or credit repayment and might not necessarily be willing to make repayment of all borrowings.
Also Check: CIBIL Full Form
How is your credit score computed?
Lenders like NBFCs and banks that provide credit to you as a customer periodically tend to share data with the bureaus. This, in turn, compute your score as a borrower by using proprietary algorithms. Various parameters impact your score as a borrower. A few of them include –
Do you as a borrower ensure to make timely repayment without any defaults? If yes, then your repayment history is on the positive end, meaning you have a higher chance of having a good score.
What’s the frequency of enquiries linked with loans or credit? If the number of enquiries, you have submitted is less then your credit score may be least impacted and hence your loan approval chances may be higher.
Mix of credit
What type of balance is maintained between unsecured and secured loans? Do you have a lot of outstanding debt? If you hold a balanced mix between secured and unsecured loans and have lower outstanding debt, then you have higher loan application approval chances.
How much does the debt increase over a time period? If you as a borrower take a higher debt? Are you using the available credit limit completely? If you have used up to 30 per cent of your credit utilisation ratio, then there are chances your score is on the positive side and your chances of loan approval are high too.
Also Read: How to Use CocoNara Hookah Coals
How does your credit score function?
While credit score might not determine necessarily a borrower’s credibility, it can have a considerable impact on your financial life. This plays a vital role in a lender’s decision to provide credit to a borrower. Those with a score of less than 750 usually are looked upon as risky candidate. Lending institutions might levy high interest on the credit provided to borrowers. This assists in making up for the additional risk. Also, they endow a shorter repayment period or need a co-signer or guarantor in the contract.
A score of 750 and above is looked upon as excellent and may allow you to get credit with a reduced rate of interest. This, in turn, leads to fewer funds being paid in the form of interest constituents over loan repayment tenure. Credit scores beyond 750 are looked upon as excellent. Creditors define their credit score range, wherein the average credit score range by many are –
Poor – Between 300 and 579
Fair – Between 580 and 669
Good – Between 670 and 739
Very good – Between 740 and 799
Excellent – Between 800 and 900
Lenders assess the borrowers’ credit scores periodically, particularly while deciding on the rate of interest changes or increases in credit card limits.
Which other parameters impact your credibility?
Based on the bank or lender, there are distinct parameters besides credit score that impact the decision criterion for offering the loan. Banks with their own internal benchmarks. Also, they might use additional data for the approval procedure. For instance, they might review your income level, bank statements, and employment history and combine such info with models and policies to further perform the credit risk analysis.
Whether you submit a credit card application or application for a loan, lenders review your credit score to determine your qualification and eligibility. Financial institutions use the credit rating to measure as well as determine whether you as an applicant qualify for the credit. The higher your credit score, the lower the risk premium is indicated.
A credit report is way more comprehensive instead of just showing your credibility. It offers details of your overall debt, credit limit and default history if any.
Frequently asked questions (FAQs)
How does your credit score show your credibility?
To judge a borrower’s credibility, lenders factor into account the evidence of periodic bill repayments as well as a track record of managing previous debts. A higher score broadly shows higher credibility.
Is there any kind of relationship between credit score and creditworthiness?
Credit rating shows your credibility as a borrower. This numerical score is often used as an expression showing your credibility. However, it is not the only determinant of your credibility. Your income also acts as an important determinant representing your credibility.
How can you determine your credibility?
Credibility can be determined by reviewing your score. Alongside this, your income stability, annual income, spending habits through credit card, etc., also contribute to your credibility over the long term.