What is a Credit Score?
The credit score refers to a number that is assigned to an individual based on certain calculations. It takes into account the individual’s various credit accounts to determine their credit-worthiness or ability to pay off debts in time. Credit scores usually range between 300 – 850 and determine how good an individual’s score is. A good score of 700 and above is considered to be good and over 800 is definitely excellent. Banking companies and lenders usually consider your credit score to evaluate if you will be able to repay the loan or not.
Moreover, the credit score is very important for your financial well-being. Depending on certain factors and a high number of credit rankings, the lenders decide to process your loan. Companies may also use your credit scores to determine whether to rent your housing or how much to charge you for any kind of insurance. These scores have a lot of influence, hence it’s crucial to understand how scores work so you maintain a good credit history.
If you do not be careful enough about your credit score, you could actually end up paying dearly for the low scores. Furthermore, the low scores can stand in the way of getting a loan for your dream house or car and so on. Even if you get past a loan, it will be expensive for you to repay it. As your credit scores reduce, it gets riskier for the lenders to process the request for a loan and your monthly repays will increase. On the other hand, a high score can also lower that interest rate for you.
Although the scores can affect in many ways, remember that there are other factors that influence the credit scores as well as interest rates too. If you visit the bank today for a loan and they turn down your loan request because of your low score, the lender may actually get a list of reasons for that low score. In order to feel safe and secure a good credit history, consider these factors before you apply for a loan.
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Factors affecting the credit score
The credit score is calculated by taking into account certain factors that are listed in the credit statement of an individual. Let us understand each of these in turn:
- Credit Utilization
The credit utilization ratio measures the balance owed on the credit card compared against the maximum limit on the credit card. The credit utilization ratio is one of the most important factors to affect the credit score of an individual. When the credit utilization ratio is high, it implies that you are overspending and affects your credit score negatively.
How you utilize your credit is one of the factors that is used in the calculation of the credit score. If you do not use a credit card at all and have no loan(s), you will have zero credit utilization. In this case, your credit score will get no points for this parameter.
- Payment History
All your payment history is accounted for in the credit report which is used to calculate your credit score. This includes payments made on time as well as payments defaulted on or made late. Payment history is looked closely at by lenders as it indicates the credit-worthiness of an applicant.
If you have made all your payments before the due date, it reflects positively on your credit statement and enhances your credit score. On the other hand, missed payments or late payments can earn you negative points on the credit score.
- Derogatory Marks
If you default on payments for a credit card or miss a loan installment on a bank or pay your dues past the due date, it will lead to a derogatory remark from the lending institution on your credit statement. Such negative information will be flagged in your credit report and will imply to a potential lender that since you defaulted on payments previously you are not capable of paying back your debt in time. Such negative marks on your report downgrade your credit score significantly.
The average age of credit history, total accounts, and credit inquiries: Other factors which reflect on your credit report and affect your credit score include the average age of your credit accounts, the total number of accounts or the credit mix, as well as the number of credit inquiries made by lenders when considering your application for a credit card or a loan. Those with no new debts in the immediate past tend to have higher credit scores than those who have recently applied for a new credit account.
The Importance of Credit Score
If you still think that the credit score is not as important as it is being made to sound, the following reasons spelling out the importance of credit score for an individual will definitely change your mind.
- Better and lower interest rates in credit cards and loans
Based on your credit score, the lending institution and/or credit card company will decide the interest rate on which to approve your loan or credit card. A higher credit score will imply that the applicant is a reliable one and more likely to repay their loans and bills on time. Therefore, banks and credit card companies will offer you the best (i.e., lower) interest rates and credit card companies will charge you lower amounts in finance charges. This way, a good credit score will help you save a significant amount of money even after taking a loan or obtaining a credit card.
- More chances of getting approved for loans and credit cards
Your credit score is what banks, lending institutions, and credit card companies will look at when processing your application. Whether it is a new loan or a new credit card, a decent credit score will allow you to get approved for them much faster. However, while the credit score is not the only criterion being considered when applying for a loan or credit card, it is one of the most significant factors to affect your application and a good credit score can enhance your chances of getting approved easily.
- Greater negotiating power
A good credit score will come in handy as a bargaining chip when you need to negotiate on interest rates for a credit card or a new loan. A good credit score is an indicator of your trustworthiness and ability to repay the loan steadily.
Hence, when negotiating with lenders, your credit score will bring you attractive offers from different lenders and you will have the choice to close the deal most favorable to you. However, if you have a poor credit score, creditors and lenders do not make any concessions on the loan terms and you often end up with higher interest rates and lower funds.
- Obtain higher limits on credit cards
Credit card companies and lending institutions take a close look at the credit score when calculating the limit on the amount to be lent to an applicant. People with higher credit scores are more likely to obtain higher limits on loans as opposed to those with average or poor credit scores as their higher score reflects their ability to pay back on time. Especially when it comes to obtaining big loans, say for a house, the applicant with a high credit score will be able to secure a much higher amount as per their needs.
- Get better car insurance rates
Given that car insurance has now become mandatory, with a decent credit score, you will able to get better car insurance rates when you purchase a new policy or when you renew it. This is because car insurance companies often take into account the credit score of the car owner in order to calculate the potential losses and then determine the monthly premiums. While a poor credit score does not imply that you will be denied car insurance, a higher credit score will enable you to get more affordable premiums.
A credit score is extremely important when it comes to obtaining loans and credit cards. While a high credit score is much more advantageous when it comes to getting better terms on loans, even with an average credit score, you can obtain a loan for various purposes.
With the PaySense app, you can avail of an instant personal loan of up to Rs 5 lakhs, within minutes by just downloading an app. Install the PaySense app on your mobile phone, register and check your eligibility, upload your documents, get approved and the funds will be transferred to you in a few days. PaySense’s easy EMI calculator is also a great tool to check your monthly installments and check your loan tenure.
Remember, it is not so difficult to obtain a loan or a credit card with an average credit score. The key lies in having credit, built over the years, to obtain a credit score lenders and credit card companies can evaluate. So, if you haven’t yet obtained any credit, now is the time to start building it for a decent credit score to plan a stable financial future.
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Aahna Gandhi is an enthusiast traveller, writer and a PR Professional. She likes sharing memorable moments from her travels and inspire others to live a life full of wonder. Known for her content, she has worked for travel, technology, lifestyle, health sectors as well as finance.
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