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Tata Capital > Blog > Generic > Decode the Formula for Calculating Your Credit Score


Decode the Formula for Calculating Your Credit Score

Decode the Formula for Calculating Your Credit Score


Understanding financial jargon can be challenging, but learning key concepts can improve your financial health. One such fundamental concept is understanding your credit score, a critical component of your financial profile.

You might have often come across terms like 'CIBIL score' and wondered, "What is a credit score, and why is it important?" This blog post aims to unravel the complexity surrounding this concept, enlighten you on how the credit score is calculated and provide tips for improving your credit score.

Whether you are a financial novice or a seasoned professional, decoding the formula for calculating your credit score can empower you to make informed financial decisions.

What is a Credit Score?

A credit score is a three-digit number ranging between 300 and 900. This score plays a pivotal role in your financial journey, influencing lenders' decisions to approve or deny your loan or credit card applications. It's a reflection of your financial credibility, showcasing how efficiently you've handled credit in the past.

Why is Credit Score Important?

The importance of a credit score in your financial journey is often underestimated, yet it can significantly influence your financial capabilities and options.

Here's why your credit score is so essential:

#1. Loan and Credit Card Approvals: The primary use of a credit score is to help lenders decide whether to approve or deny a loan or credit card application. A high score signals to lenders that you're a responsible borrower, thereby, increasing your chances of approval.

#2. Favourable Interest Rates: Lenders not only use a credit score to determine your eligibility for a loan or credit card but also to set the interest rate. A high credit score can secure you lower interest rates, leading to significant savings over the term of your loan.

#3. Credit and Loan Limit: Your credit score can influence the amount of credit a lender is willing to offer. With a high score, you might be eligible for higher credit limits or larger loans.

#4. Rental Applications: Many landlords check potential tenants' credit scores as part of the rental application process. A poor credit score can make it harder to rent a house or apartment.

#5. Employment Opportunities: In some industries, particularly those involving financial responsibility, employers might check your credit score during the hiring process. A strong credit score can give you an edge over other candidates.

Consider two individuals, Alice and Bob. Alice has a strong credit score due to her timely bill payments, low credit utilisation and diversified credit history. Bob, however, has a lower credit score as he frequently misses payment deadlines and uses his entire credit limit. When they both apply for a home loan, Alice's application is quickly approved at a competitive interest rate, while Bob faces challenges and higher interest charges. This example illustrates how credit scores impact loan approval and borrowing costs, emphasising the significance of maintaining a good credit score.

Decoding the CIBIL Score Calculator: How Is the Credit Score Calculated?

Calculating a credit score might seem complex, but with the help of a CIBIL Score Calculator, it becomes a straightforward task. Let’s decode this formula.

The CIBIL Score Calculator uses the information from your credit report to generate your credit score. It takes into consideration five primary factors:

#1. Payment History (35%): Your payment history, which includes your track record of paying off past loans and credit card bills, has the most significant impact on your credit score. A consistent history of timely payments helps in improving your credit score.

#2. Credit Utilisation (30%): This is the ratio of your current total credit card balances to your total available credit limit. Lower credit utilisation (ideally below 30%) signals better debt management, positively impacting your credit score.

#3. Credit History Length (15%): This involves the duration of your credit history. A longer credit history generally increases your score, provided it’s coupled with a positive payment history.

#4. Credit Mix (10%): A balanced combination of secured (like mortgages or auto loans) and unsecured (like credit cards or personal loans) credits can enhance your score.

#5. New Credit (10%): Frequently applying for new credit can flag you as a potential risk to lenders and may negatively affect your score.

Improving Your Credit Score: The Road Ahead

Improving your credit score might seem challenging, but with a comprehensive understanding of the credit score system and careful financial planning, it becomes a feasible journey. Below are a few effective strategies that can set you on the path to improving your credit score:

#1. Timely Payments: This is the first and foremost strategy for improving your credit score. Regularly paying your credit card bills and loans on time enhances your credibility in the eyes of potential lenders. If you've had a history of delayed or defaulted payments, aim to change this pattern. Set up payment reminders or automatic payments to ensure you don't miss any future ones. Over time, a consistent track record of timely payments can substantially elevate your credit score.

#2. Maintain Low Credit Utilisation: This refers to keeping your balance low compared to your overall credit limit. Experts recommend maintaining a credit utilisation ratio of 30% or less, indicating you're not overly reliant on borrowed money. If your credit utilisation is high, consider creating a repayment plan to reduce it. This not only helps in managing your debt better but also positively impacts your credit score.

#3. Avoid Unnecessary Credit: It may be tempting to apply for a new credit card or loan whenever you get an attractive offer. However, remember that each credit application triggers a hard inquiry on your credit report, which can temporarily lower your score. Hence, only apply for new credit when necessary and avoid making multiple applications in a short period.

#4. Monitor Your Credit Report: Keep a close eye on your credit report for any errors or inconsistencies. This includes checking for mistakes in your personal information, account status, credit limits and more. If you spot any errors, dispute them immediately with the credit bureau. Regular monitoring can also help you detect signs of identity theft early, allowing you to take prompt action.

#5. Diversify Your Credit: A healthy mix of both secured and unsecured credits can reflect positively on your credit score. This shows lenders that you can handle various types of credit responsibly. However, remember to not take on debt for the sake of diversifying your credit. Ensure it aligns with your financial needs and capability to repay.

#6. Limit Closing Older Credit Accounts: Your credit history length plays a crucial role in your credit score. By keeping your older credit accounts open and in good standing, you can lengthen your credit history, which can potentially uplift your score.


Understanding and improving your credit score is integral to financial stability and progress. It's the key that unlocks various financial opportunities and serves as an indicator of your financial health.

Tata Capital uses credit scores as a critical factor in its decision-making process. Applicants with higher credit scores are more likely to receive loan approval with favourable terms and conditions. Moreover, it offers a wide range of resources and services, such as free credit score checks, which can help individuals understand their credit standing better and take necessary steps to improve it.

In essence, your credit score is a reflection of your financial trustworthiness and integrity; therefore, always aim to keep it high. Decode the formula, master the CIBIL Score Calculator and take charge of your financial future. With consistent efforts and responsible financial habits, the road to a better credit score is always open!

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