If you have ever applied for a loan or a credit card, you may have heard of the term credit score. But what exactly is a credit score, and why is it important? Your credit score plays a crucial role in the decisions made by lenders (banks, NBFCs, and credit institutions) when you apply for any loan or a credit card. This blog covers everything you need to understand about credit score, how it works, and its importance.

What is a Credit Score?

A credit score is a three-digit number between a range of 300 to 900. It shows how well you’ve handled the money you’ve borrowed in the past. The closer the number is to 900, the better. It helps lenders understand how likely you are to pay back a loan on time. In short, your credit score helps them decide how risky it is to give you a loan or any other credit product.

Purpose of a Credit Score:

• It helps lenders assess risk.
• A high credit score shows you are a responsible borrower.
• A low score indicates higher risk.

Credit Score vs Credit Report

Your credit score and credit report are closely related, but they are not the same. A credit report is a detailed record of your credit history. It includes information about your credit accounts, payment history, outstanding balances, and recent credit inquiries.

On the other hand, a credit score is a three-digit number that summarises your creditworthiness based on the information in your credit report.

Who Uses Credit Score?

A credit score is used by:

Users	Purpose
Banks & NBFCs	Decide on loan approval and rate of interest (ROI)
Credit Card Companies	Evaluate credit card eligibility
Credit Institutions	Offer loans and credit lines
Employers (In Some Cases)	Assess financial responsibility.

They check your credit report from credit bureaus like Equifax, Experian, Crif Highmark, and TransUnion Cibil.

Credit Score Ranges and Meaning

Why Does Your Credit Score Matter?

Understanding why the credit score is important can save you time, money, and stress. Whether you are applying for a personal loan, home loan, car loan, or credit card, your credit score plays a key role in the approval process and terms offered. Here’s how:

1. Loan Approvals

• A good credit score (usually 750 and above) increases your chances of loan approval. Lenders see you as a low-risk borrower, which makes them more willing to approve your application. According to TransUnion CIBIL, applicants with a score of 750+ have higher approval rates than those with lower scores.
• A bad credit score (below 600) may lead to rejections or more scrutiny from lenders. It signals higher risk, and banks or NBFCs may hesitate to give loans.

2. Interest Rates

• A higher credit score often qualifies you for lower interest rates. A high score shows responsible borrowing and repayment habits, so lenders reward you with better terms.
• A lower credit score usually leads to higher interest rates, making loans more expensive.

3. Credit Card Limits and Approvals

• If you have a good credit score, banks and credit card companies are more likely to offer you higher credit limits and premium cards.
• A bad credit score can lead to limited card options and lower limits, reducing financial flexibility.

4. Other Uses

• Some employers may check your credit report to assess your financial health and creditworthiness. A poor credit history might raise concerns about your financial behaviour.
• A strong credit score doesn’t just help with loans—it reflects your overall personal finance management and can open doors to better financial opportunities.

Key Factors that Affect Your Credit Score

Here are the major factors that influence your credit score:

• Payment History: Timely repayment of EMIs and credit card bills is the most critical factor.
• Credit Utilisation: How much credit you use compared to your total available limit.
• Credit History Length: The time since you first started using credit.
• Credit Mix: The variety of credit types you’ve used, like loans and credit cards.
• Hard Inquiries: It is a record of how often you apply for credit products.

How to Check Your Credit Score?

• You can check your credit score for free once a year from each credit bureau (Equifax, Experian, CRIF Highmark, and TransUnion CIBIL).
• DMI Finance also offers free credit score checks. Download the DMI Finance app and check your credit score for free as many times as you want.

How to Protect Your Credit Score?

Keeping your credit score safe is important for maintaining strong financial health. Here’s how you can do that effectively:

• Avoid Fraud: Identity theft and financial fraud can seriously damage your credit. Be cautious about where and how you share your personal information, especially online.
• Regularly Check Reports for Errors: Sometimes, credit reports may contain mistakes such as incorrect account details. These errors can hurt your score if left unchecked. Review your credit report regularly.
• Use Credit Monitoring Tools: Credit monitoring tools alert you to any changes in your credit report, such as new accounts, inquiries, or changes in balances.

Understanding what a credit score is and its importance is crucial for your financial health. Whether you are aiming for a loan or a new credit card, maintaining a good credit score makes life easier. Follow responsible borrowing habits, check your credit score regularly, and fix errors to stay credit-ready!

Frequently Asked Questions (FAQs)

1. What is a credit score, and why is it important?

A credit score is a three-digit number that shows how creditworthy you are. Lenders use it to assess the risk of giving you a loan or credit card. A higher credit score increases your chances of approval.

2. What factors impact your credit score the most?

The main factors affecting your credit score are payment history, credit utilisation, length of credit history, new credit inquiries, and credit mix. The most important factors are paying on time and keeping your credit utilisation low.

3. How can I check my credit score for free in India?

You can check your credit score for free once a year from credit bureaus like TransUnion CIBIL, Experian, Equifax, and CRIF Highmark. DMI Finance also offers free credit score checks. Download the DMI Finance app and check your credit score for free as many times as you want.

4. Does checking your credit score lower it?

No, checking your credit score yourself is considered a soft inquiry and does not lower your score. However, when lenders check it for loan approval, it is considered a hard inquiry, which may slightly impact your score.

5. What is the difference between a credit report and a credit score?

A credit report is a detailed record of your credit history, while a credit score is a three-digit summary of that report. Lenders use both to assess your creditworthiness.

6. What credit score is considered bad in India?

In India, a credit score below 600 is usually considered bad. It may lead to higher interest rates or loan rejection.

Financial Terms Simplified

Term	Definition
Creditworthiness	A lender’s assessment of how reliable you are when it comes to repaying loans.
Credit Product	Any financial product that allows you to borrow money, such as a credit card or personal loan.
Financial Behaviour	Your habits and history of using, repaying, or managing credit and loans.
Identity Theft	A type of fraud where someone uses your personal information/ documents to take loans or access credit in your name.
Dispute (Credit Report)	A formal complaint you file with a credit bureau if you find incorrect information in your report.
Approval Rate	The chances of your application getting approval for a loan, credit card or any credit product.