Need a loan? Here's how your credit score is calculated

Applying for loan from a financial institution leads to the assessment of one's credit score. A strong credit score boosts the chances of the loan being sanctioned, whereas a weak score can hinder the process.

The calculation of credit scores is undertaken by organisations known as credit bureaus. In India, there are four such credit bureaus: Experian Credit Information Company of India, CRIF High Mark Credit Information Services, Equifax Credit Information Services, and TransUnion CIBIL.

First, what is a credit score?

Credit score is a number assigned to an individual to denote creditworthiness. The number is in the range of 300-900, with a higher number indicating a better credit profile and vice versa.

A score of 300-399 is categorised as "very poor", 400-577 as "poor", 578-644 as "fair", 645-693 as "good" and 694-900 as "excellent".

Lenders place loan seekers with very poor score under the high-risk category, which means that they could only be issued a loan that comes with a high rate of interest.

As the credit score rises, the accessibility of loans improves. Lenders offer a variety of options, with suitable rates of interest.

How is the credit score calculated?

Credit scores are calculated by credit bureaus, which use different algorithms. They take into consideration the data received on an individual from financial institutions, such as banks and other registered lenders.

The credit score of an individual may differ across the different credit bureaus, said Manish Jain, Country Managing Director, Experian India, while speaking to Moneycontrol. “That’s because the scores are built on algorithms, and every organisation looks to build those algorithms based on their data set, and availability of information,” he explained.

For an accurate projection of the credit profile, banks and other lending entities must also share data in a timely manner with the credit bureaus, Jain told the publication.

Notably, an individual who wants his credit score to be calculated is required to share details such as name, phone number, permanent account number (PAN) and date of birth.

When a person seeks to know his credit score, then the process is known as soft pull or soft inquiry. This does not affect the credit score, as per experts. However, the credit score could be affected by repeated hard inquiries or hard pulls, which refer to the assessment undertaken by credit bureaus after receiving a request from the loan-issuing body.