Credit Score Decoded: How It Works? & How to Improve It?

by KarNivesh | 08 August, 2025

In today’s financial world, understanding your credit score is essential. Whether you’re applying for a loan, a credit card, or even renting an apartment, your credit score can make or break your financial opportunities. This guide simplifies the concept of credit scores, how they work, and how you can improve yours in India.

What is a Credit Score?

A credit score is a three-digit number ranging from 300 to 900 that reflects your creditworthiness i.e., how likely you are to repay borrowed money. The higher your score, the better your chances of getting approved for loans or credit cards at favorable terms.

India's most popular credit score is the CIBIL score, but other bureaus like Experian, Equifax, and CRIF High Mark also provide scores based on your credit history and payment behavior.

Credit score categories ranging from poor to excellent with Canadian average score highlighted.

Credit Score Ranges in India

Score Range	Category	Interpretation
300–549	Poor	High risk; needs improvement
550–649	Fair	Limited credit options
650–699	Good	Average approval chances
700–749	Very Good	Better terms and higher approval chances
750–900	Excellent	Access to best financial products

A score of 750+ is ideal and opens the door to the best financial offers.

Factors That Impact Your Credit Score

Credit bureaus evaluate five main factors:

1. Payment History (35%)– On-time payments build trust. Even one missed payment can hurt your score.

2. Credit Utilization (30%)– It’s ideal to use less than 30% of your credit limit, with under 10% being best.

3. Length of Credit History (15%)– The longer your credit history, the better. Don’t close old accounts.

4. Credit Mix (10%)– A healthy mix of credit cards and loans improves your score.

5. New Credit Inquiries (10%)– Too many recent applications can lower your score.

Credit Score Factors - Understanding what impacts your credit score the most

Who Uses Your Credit Score?

• Banks & Financial Institutions: For loan approvals, interest rates, and credit card limits.

• Landlords: To evaluate tenant risk.

• Insurance Companies: To determine premiums.

• Employers: In sensitive roles to assess financial behavior.

• Utility Companies: To assess deposit needs.

Credit Score Myths – Busted

• Myth: Checking my credit score lowers it– False. Self-checks are "soft" inquiries and have no impact.

• Myth: Carrying a balance improves scores– No. Pay off your balance fully each month.

• Myth: One universal score exists– No. Different bureaus give different scores.

• Myth: Closing old accounts helps– Wrong. It can actually hurt your score.

How to Improve Your Credit Score

Improvement takes time, but here’s how to go about it:

Immediate Steps (0–2 months)

• Set up Auto-pay: Avoid late payments.

• Check Your Credit Report: Dispute any errors.

• Reduce Credit Card Balances: Lower utilization equals better scores.

  
  

Short-Term Strategies (2–6 months)

• Request Higher Credit Limits: Lowers utilization ratio.

• Become an Authorized User: Use someone else’s good credit history.

• Debt Consolidation: Use a personal loan to pay off high-interest debts.

  
  

Long-Term Habits (6+ months)

• Use Secured Credit Cards: Especially for building credit from scratch.

• Try Credit Builder Loans: Repay over time to build history.

• Maintain a Healthy Credit Mix: Balance between credit cards and loans.

Tips for Beginners: Building Credit from Scratch

1. Start with a Secured Card: Use responsibly.

2. Take a Credit Builder Loan: Build history over 6–12 months.

3. Become an Authorized User: Leverage a trusted relative’s account.

4. Apply for Unsecured Credit: Once your credit profile improves.

What to Avoid

1. Making Only Minimum Payments– Leads to high utilization and interest.

2. Closing Old Accounts– Hurts history and available credit.

3. Multiple Loan Applications– Triggers hard inquiries, lowers score.

4. Ignoring Your Credit Report– Mistakes can go unnoticed.

5. Co-signing Loans– Risky if the borrower defaults.
   

India’s Credit Bureaus

1. CIBIL– Most used by lenders.

2. Experian– Known for individual and business reports.

3. Equifax– In-depth credit insights.

4. CRIF High Mark– Strong in microfinance sector.

Each uses slightly different data, so your score may vary between bureaus.

Future of Credit Scoring in India

• Alternative Data: Like rent and utility payments now included.

• AI & Machine Learning: Smarter, fairer credit scoring.

• Real-Time Updates: RBI mandates fortnightly updates to bureaus.

Your credit score is a powerful financial tool. Building and maintaining a strong score can save you money, unlock better financial products, and give you peace of mind.