Why students must start establishing good credit scores

Understand how credit scores work, tips to improve them, and why they matter for students' financial future.

A credit score is a statistical method to measure an individual’s probability of repaying borrowed money and a key indicator of their financial reliability. This is generated by credit bureaus, which collect and maintain information about an individual’s or business’ financial activities. These organisations are regulated by the Reserve Bank of India (RBI) under the Credit Information Companies (Regulation) Act 2005.

A credit score is a three-digit numeric summary, ranging from 300 to 850, derived from data provided by lenders and compiled in the Credit Information Report (CIR). It is determined by analysing credit history, including the number of open accounts, total level of debt, repayment history, and other factors. For example, a person with a credit score of 800-850 is considered financially responsible. He/she pays loans, credit card bills, rent and so on on time. At the other end, a credit score of 300-579 is a poor rating and means that the individual has defaulted payment several times and has little chance of being given new loans.

Apart from the above, those with minimum or no credit history fall into the “new to credit” category. Students applying for education loans usually come under this section. As a result, their academic background and other data are examined to consider potential for employment before their loans are sanctioned. Students can strengthen their credit scores by following these tips:

Timely repayment: Paying the EMI regularly is crucial. Enable automated payment or set a reminder to ensure you adhere to payment timeline, as late payment can have a negative impact.

Credit utilisation: Those who have credit cards should ensure that credit utilisation is below 30% of the available limit. This indicates disciplined financial behaviour and can enhance one’s credit score and offer opportunities for future borrowing.

Length of credit history: A longer credit history reflects stability and reliability in handling financial obligations and gives lenders a clearer picture of borrowing habits, payment consistency, and overall financial stability.

Credit types: A mix of secured credit and unsecured credit portrays a well-rounded credit profile.