How is Credit Score Calculated in India? Formula Decoded.

How is Credit Score Calculated in India? Formula Decoded.

Credit Score (CIBIL Score) Personal Loan
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In today's fast-paced world, credit has become an integral part of our lives, especially when we focus on financial management. Whether you plan on buying a house or a car, or even when you wish to apply for a credit card, lenders and financial institutions rely heavily on credit scores to assess your creditworthiness. In India, credit scores play a crucial role in determining the eligibility and terms of loans and credit facilities. However, many individuals are still unaware of the factors contributing to their credit scores.

In this article, we decode the formula behind credit score calculations in India, shedding light on the key elements that impact your creditworthiness.

What is a Credit Score?

Let us define a credit score first before delving into the formula. An individual's creditworthiness is shown by their credit score, which is a three-digit number. A credit score in India can be between 300 and 900, with higher numbers signifying greater creditworthiness. This score reflects a person's likelihood of making timely debt repayments and is based on various financial parameters found in information gathered by credit bureaus.

Generally, a credit score below 580 is considered poor, 580 to 669 is fair or mid-range, and 670 to 850 is considered good to excellent. Maintaining a good credit score is crucial for securing favourable interest rates and access to various financial opportunities.

The Credit Score Calculation Formula

The exact formula used by credit bureaus to calculate credit scores in India is proprietary and not publicly disclosed. However, the calculation is based on several key factors, and by understanding them, individuals can take steps to improve their creditworthiness. The factors that impact your credit score in India are:

  1. Payment History (35%)

    The most critical part of your credit score is your payment history. Lenders look for a long track record of timely repayments on loans and credit cards. Any late payments, defaults, or delinquencies negatively affect your credit score. The longer your history of on-time payments, the better your credit score will be.

  2. Credit Utilisation (30%)

    Credit utilisation refers to the percentage of your available credit that you're currently using. High credit utilisation suggests financial stress and may indicate a higher risk of default. To maintain a healthy credit score, it is advisable to keep your credit utilisation below 30% of your total credit limit.

  3. Credit History Length (15%)

    The length of your credit history also plays a role in your credit score calculation. A longer credit history demonstrates your ability to manage credit over an extended period, which can positively impact your credit score. Therefore, it is essential to maintain old credit accounts responsibly, even if they are no longer in active use.

  4. Credit Mix (10%)

    Credit bureaus also take into account the variety of credit accounts you have. A healthy credit mix that includes a combination of credit cards, retail loans, and secured loans can have a positive impact on your credit score. However, be cautious not to open multiple credit accounts unnecessarily, as this could be perceived as a sign of financial instability.

  5. New Credit Applications (10%)

    Every time you apply for new credit, an inquiry on your credit score report is generated. Multiple credit inquiries within a short period can indicate a higher credit risk and may lower your credit score temporarily. It is best to limit credit applications to when you genuinely need credit and avoid excessive inquiries.

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The Role of Credit Bureaus

In India, there are four primary credit bureaus responsible for collecting and maintaining credit data: Credit Information Bureau India Limited (CIBIL), Equifax, Experian, and CRIF High Mark. These credit bureaus gather information from various lenders and financial institutions to generate credit score reports and calculate credit scores.

Each credit bureau has its own credit score calculation model, and the scores generated may vary slightly from one bureau to another. However, all bureaus apply similar principles based on the factors mentioned above.

How to Improve Your Credit Score?

Now that we've uncovered the factors affecting your credit score, let us study some actionable tips to improve it:

  1. Make Timely Payments

    Make sure to pay all your credit card bills and loan EMIs on time. Set reminders or opt for auto-debit to avoid missing due dates.

  2. Reduce Credit Utilisation

    Aim to keep your credit card balances low and avoid maxing out your credit limits.

  3. Maintain a Mix of Credit

    Where possible, diversify your credit portfolio with a mix of secured and unsecured loans, and maintain a healthy credit mix.

  4. Avoid Frequent Credit Applications

    Limit credit inquiries and apply for credit only when necessary.

  5. Regularly Monitor Your Credit Report

    Check your credit score report regularly for inaccuracies and dispute any errors you come across.

The Impact of Credit Scores on Loan Approvals and Interest Rates

Your credit score is a critical factor that significantly influences your loan approvals and the interest rates you'll be offered by lenders. Understanding how your credit score affects these aspects can empower you to make informed financial decisions.

  1. Loan Approvals

    A higher credit score enhances your chances of getting approved for loans. Lenders view individuals with high credit scores as low-risk borrowers, as they have demonstrated responsible credit management in the past.

    This reduces the lender's apprehension about repayment and increases the likelihood of loan approval. On the other hand, a low credit score can lead to loan rejections, making it challenging to access credit facilities when you need them the most.

  2. Interest Rates

    Your credit score affects the interest rates banks and financial institutions charge on loans and credit cards. With a high credit score, you're likely to qualify for loans with lower interest rates, which can lead to substantial savings over the loan tenure.

    Conversely, a lower credit score may result in higher interest rates, increasing the cost of borrowing significantly. Thus, borrowers with lower credit scores might end up paying more for the same loan compared to someone with a higher credit score.


Your credit score is a significant financial tool that can greatly influence your access to credit and financial opportunities. Understanding the formula behind credit score calculation in India allows you to take proactive steps to maintain a healthy credit profile.

By focusing on responsible financial habits, timely repayments, and credit management, you can improve your creditworthiness and secure a brighter financial future. Remember, a good credit score not only opens doors to better credit options but also paves the way for financial stability and peace of mind.

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