Demystifying Credit Score Ranges

The other day, I was pouring out some coffee for myself at the office meeting lounge when a couple of my team members walked in (we were cautiously getting back to work with social distancing). Nodding to me, they continued, engrossed in their debate.

One of them, Krithika, was in the market for a house. She had budgeted and saved up. She had waited till the market was just right. She had patiently scoured the landscape until she found a few houses she liked.

And now, it was time for the big move - getting a loan. She had done everything right so far.

But there was a problem.

At a credit score of 710, she was worried that she fell just that teeny bit short of the ideal range that banks looked for.

“I think you are in. Banks only look for 675 and above,” said Pranav.

“No, I think I am borderline. I need to build it up a little more,” said Krithika.

“What do you think, Vikas?” they turned to me.

Irony. My young fintech professionals could not decide on whether a credit score was good enough!

But I can’t blame them. Credit scores are confusing. I know they were to me when I was younger, and still finding my way around personal finances.

So, what exactly is a credit score? Those three digit numbers are an assessment of your creditworthiness. That is, a rating of your ability to make repayments. The better the credit score, the easier it is to obtain loans. A credit history begins to form based on the loans you take and repayments you make.

Here’s where different credit score ranges will place you.

300-499 You are highly risky, and you have a lot of work ahead of you
500-599 You are still extremely risky. You might be considered by a select few lenders but expect steep rates and penalties
600-699 You are a subprime or fairly risky borrower. You will still need to pay inflated interest rates if you do get a loan
700-900 You have made it to the finishing line! You are now a safe borrower, eligible for attractive interest rates, and favourable deals.

But what happens if you are new to credit and don’t have a credit history at all?

Take the first step towards building your credit score by applying for a low-limit credit card or taking a loan. Start paying small EMIs, establish a repayment history of a minimum of 6 months in order to start generating your first credit score.

Use P10’s credit score check every 4 to 5 months (that’s the minimum time needed for any changes to reflect in your scores) and keep a close eye on your progress. Checking your credit score routinely is one of the best ways to ensure that you are maintaining a stable credit. That’s why we built a credit score check as one of the first features on P10.

As I explained to Krithika, with a score of 710, she could be termed as a ‘near prime’ borrower, or someone who could be trusted enough to be offered loans with good interest rates. If she kept up her disciplined credit management, checking her scores regularly, she could easily be a star borrower soon.

I met Krithika and Pranav again a month later. This time the discussion was about the menu for Krithika’s housewarming party.