What is the Importance of a Good Credit Score

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A strong credit score can help you receive better loan interest rates and access to the top credit cards. Click here to find out how you can maintain a good credit score.Image

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A credit score is a measure of your creditworthiness. The first thing lenders check when you apply for a loan or a credit card is your credit score. It gives them an idea of whether you have the ability to repay the borrowed sum. Hence, it is important to maintain a high credit score. A credit score is calculated by the credit bureaus in the country after taking into consideration several factors like payment history, credit exposure, credit mix, credit inquiries, and the length of credit history. For those unaware, a credit score ranges from 300-900. Generally, lenders consider a credit score of 750 and above as ideal. Therefore, you should always take measures to have a credit score that is close to 900. Let’s take a look at the importance of having a healthy credit score.

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Importance of Maintaining a Good Credit Score

Makes you eligible for loans – A high credit score gives you the ticket to be eligible for getting loans and credit cards. If you have a good credit score, it suggests that you have been repaying your debt and are experienced in handling credit. It will give lenders a good reason to offer you loan as you have a low probability of turning a defaulter.
Credit cards – Along with loans, high credit score will also help you get a credit card with better rewards and benefits. With a credit score of 750 and above, you will be able to get credit cards that are suitable for your needs.
Lower rate of interest – One of the benefits of having a healthy credit score is that banks might offer your loans at a lower interest rate. Considering your repayment history, there is a high possibility that you will get discounts on the interest rate for loans.
Higher credit card limits – A high credit score will not only get you a lower rate of interest on your credit cards and loans but will also help you in getting a higher loan amount. A bad credit score, on the other hand, will result in lower credit limit. Having a high credit score suggests that you are able to handle credit in a good way and, therefore, banks might consider offering you a credit card with higher credit limit.
Quicker loan approvals – Several lenders offer pre-approved loan to consumers who have a long credit history and a high credit score. Quicker loan approvals by banks is one of the biggest benefits of a high credit score. Your loan application gets approved immediately and it does not have a waiting period.
Adds value to a visa application – If you have a high credit score, it adds good weightage to your visa application. Your income tax records are taken into consideration by most countries like the United States or the UK when you apply for a visa. Hence, a healthy credit score could give an additional momentum to the visa application.
For the future – Even if you don’t see yourself applying for loans or credit cards in the near future, ensure that you still maintain a good credit score or credit history. A good credit score will come in handy when you apply for home loans, personal loans, credit cards or any other kind of loans in the future. It is always better to have a credit history as it gives lenders something to measure your credit handling.

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Tips to Maintain a Healthy Credit Score

Pay all your bills or EMIs on time.
Avoid delay in paying bills.
Do not default on loans and credit cards.
Maintain a low credit utilisation ratio.
Do not close old credit cards as you will lose out on good credit history.
Avoid making multiple credit inquiries at the same time.
Do not apply for multiple loans or credit cards unless you really need it.
Maintain a balance of secured and unsecured loans.
Maintain a good relationship with the banks and financial institutions.
Review your credit report periodically.
Check your credit score from time-to-time.

How is a credit score computed

While every credit bureau has their own model when it comes to calculating credit score, there are certain constant factors which every credit bureau takes into consideration. The factors taken into account are:

Payment history: 35%
Credit utilisation : 30%
Credit history length: 15%
New credit: 10%
Credit mix: 10%

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Since 2017, the Reserve Bank of India (RBI) made it mandatory for all the credit bureaus in the country to offer one free credit report to consumers in a calendar year. Currently, there are a total of 4 credit bureaus in the country viz -TransUnion CIBIL, Equifax, Experian Credit Information Company and High Mark Credit Information Service. This essentially means you can get four credit reports in a year. Moreover, you can even subscribe to any of these bureaus and get your credit reports which also contains your credit score.

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FAQs on Importance of a Good Credit Score

What should be my credit utilisation ratio?Ideally, you should not use more than 30% of your credit limit from your credit card on a monthly basis. For example, if your credit limit is Rs.1 lakh, then you should not spend more than Rs.30,000 on a monthly basis. Your credit score will improve if you manage to keep a low credit utilisation ratio.
How can I improve my credit score?In order to improve your credit score, start by paying your credit card bills on time. Use your credit card smartly and pay the bill on time. Do not apply for too many loans. If you have availed any loans previously, make sure you repay the loan amount within the specified tenure which in turn will improve your credit score. Also, check your credit score at least every quarter. Sometimes, your credit score may get affected due to an error. In case of any error in your credit score, get it fixed immediately.
Does too many credit inquiries affect my credit score?Yes, every time you apply for a loan or a credit card, the lender conducts an inquiry regarding your credit score. Too many inquiries can severely impact your credit score. Hence, apply for a loan or a credit card only if you need it.
My credit score is good? Will I get any offer on my loan?Whether you will get any offers on your loan will differ from bank to bank. However, if you have a good credit score, the chances of your application for a loan getting approved is extremely high. The bank may also offer you a loan at a lower interest rate if you have a credit score of 750 and above.
My credit score is poor. How can I get a loan?If your credit score is poor then it will become difficult for you to get a loan. Even if the bank approves your application for a loan, the chances are high that you will be charged a higher interest rate. Hence, if your credit score is poor, work on improving it before applying for a loan. It is also recommended you get in touch with a bank official who may offer you a solution to not only getting your loan application approved but also helping you improve your credit score.