Calculating your credit score

What goes into calculating your credit score, and why you should pay more attention to it now than ever?


India’s hon. Finance Minister Ms. Nirmala Sitharaman, on 24th Mar 2020, announced that the citizens of India will be exempted from minimum account balance charges for 3 months. Sigh! What a relief, with restrictions on getting out of your house only if needed, and you bank situated far away, you are left with probably only 1 option but to withdraw from the nearest bank or tap into your savings from one bank more than the other account you may have. This exemption is only for 3 months though. What does this mean? On 25th Jun 2020 you will need to ensure your bank accounts have a minimum amount, not only to avoid the fees, but also to maintain your credit score, one that you have been nurturing all this while.

Wait, did you say nurture, but I am not sure what to do to help my credit score grow or increase from where it is right now, in fact I don’t even know my credit score. It’s like buying a plant and keeping it in the corner of your balcony, forgetting about it, you’re not sure what’s the condition of the plant, now you go and peep to see if its alive, yay it is alive, that good news, so you need to know how to take care of the soil, the watering needs, pruning etc. So what goes into growing your credit score?

Loans – Yes any loan you may have taken in the past and current will go into your score, personal loan, auto loan, home loan, etc. gets captured. So what about these loans, the amount you have taken currently in total from all your loans, the outstanding you have, your payment history. Let’s take an example of an auto loan, say you took a two wheeler loan and are paying your instalments on time every month. That’s good, its gets reported that you are a good customer who pays on time every month. And when your loan tenure is over you get extra points for completion of your loan. All this for being a good customer. And imagine a scenario where you are not able to make a payment on time for your loan. You forgot the due date, you did not know how to make the payment, you did not know where to make the payment and so made the payment late. Oh no! your score gets minus points, that means it comes down, and say if the next due date approaches and you have to make 2 months of payment, meaning the previous month EMI was skipped completely, the number of minus points is even higher.

So now you know how your behaviour of repayment affects your score positively or negatively. Likewise, credit cards, the number of cards you own, the total credit limit on all the cards out together, the total amount due for these cards, whether you make a minimum payment each month or clear the entire bill amount. Yes, you read that right you get extra points that boosts your credit score if you pay in full, while you still get points for making a minimum payment on time.

I don’t have a credit card or a loan yet, will My score be good? Is that your question. If so, were you a guarantor for your friend or colleague for his or her loan. Yes, their repayment history effects your score. So be careful where you are singing as a guarantor.

Even if you are not approved a loan, the number of applications you make for a loan goes against your score. So avoid submitting multiple applications at once.

Coming to the point where we started all of this conversation, your bank’s balance. The overdraft fee or minimum account fees that were charged to your account is also reported to the credit scoring agency by your bank, and so it’s very important to maintain the minimum balances in your bank account and not get an overdraft fee too. So keep an eye on these in June and now that you know most of the elements that nurture your score, get growing it.