An Explainer: Credit Score

Before extending a loan, banks evaluate the re-payment capacity of a borrower. A borrower's credit score is an effective method to draw a conclusion. But what is a credit score?

Simply put, credit score is a numerical rating, given to a borrower by credit rating agencies after evaluating his past credit repayment record. For instance, you might have taken a car loan in the past. Banks maintain a record of your re-payment history and provide all loan-related data to credit bureaus, based on which the latter assigns a credit score to a borrower. In case you duly paid the loan, this record will reflect in your credit score, indicating a good re-payment record. Similarly, any defaults in your re-payment process will reflect poorly in your credit score.  An absolute absence of credit history also does not work in a borrower's favour as this means there is no data present to analyse your credit behaviour.

Also, it is not only loan-related payments that are taken into account while a credit bureau assigns you a score. Cheque bounces and late payments of other liabilities also have a bearing on your credit score.

While a credit score between 300 and 600 is considered risky financial institutions, a score above 700 is considered no-risk zone. Depending on your credit score, banks may or may not decide to lend you credit.