The credit score mainly denotes your creditworthiness which is expressed as a score out of 900 points. It is important as that’s the first thing that the lenders look at while lending funds to a borrower when they apply for a loan or a credit card. It gives them a fair idea of whether the borrower would be able to repay the loan amount or the borrowed sum on time. So, eventually, if you are to go for credit, a credit score is utterly important which you can maintain by making all your credit payments on time, checking your credit scores at frequent intervals, paying off your credit card bills on time, and most importantly keeping your credit utilization below 30%.
Importance of the credit score
Whether you are a consumer, purchaser, or business owner, most of us today are highly dependent on credit which makes credit scores an important metric. The whole system of credit is dependent on the credit score and possessing an excellent credit score is the precondition for availing of any loan or credit from banks or financial institutions.
The credit score is probably the first thing any credit issuer would check when you apply for credit and the process of credit approval is almost the same for all lending banks and financial institutions. The credit scores and the credit reports are the cardinal factors for the lenders to check the borrower’s reliability to repay the debt. It helps the lender to assess the dimension of the risk and the higher the credit score the lower the risk.
As discussed the credit score is the testimony of the creditworthiness of an individual, and improving it becomes mandatory if the score is on the lower side. Having a lower credit score may not stop you from obtaining a loan but it may cost you more as the rate of interest may be high. Although the credit score is not the only mechanism through which lenders arrive at the creditworthiness, they have their own methods of assessing the risks too. But however, the lower the credit scores the higher the rate of interest which would eventually lead to higher monthly installments.
Advantages of a good credit score
The importance of a good credit score cannot be undermined irrespective of your stage of life, you are in. Be it your dream business venture that requires a credit capital, home loan, loan for your home renovation, education loan or any other credit requirement your credit score would matter, and most importantly a good credit score would reduce the cost of capital with lower interest rates. Even the outstanding debts would be charged to you at a lower interest rate.
The importance of credit score is not only limited to the credit seekers alone as it can also help you avail more attractive insurance premiums and products at lower investment too. In employment too, a good credit score portrays a good image of your financial situation and habits. Apart from these, you have other benefits too if you have a good credit score like you can avail a pre-approved loan, higher loan approval rates, access to the best of the credit cards, and a higher credit limit. So it is important that we improve our credit scores even if it is on the lower side. Here’s how to do it!
Factors on which credit score is calculated
Even before you attempt to improve your credit score, it is important to know how the credit score is calculated and what constitutes the credit score. It is important that you know the potential areas of improvement for a healthy credit score by chalking out a plan. The main factors on which your credit score depends are:
- The credit payment history of the borrower weighed at 35%
- The current debts of the borrower weighed at 30%
- Duration or the length of the credit history weighed at 15%
- The credit mix of the individual weighed at 10%
- Frequency of new credit application weighed at 10%
How to improve your credit score?
Undoubtedly, offering credit by the banks and the financial institutions is a risky affair and the risk assessment is done based on few factors of which the credit score is a vital metric. For authentic credit approval, banks and financial institutions look for longer credit history as the longer the credit history under review, the better the accuracy and assessment of the credit appraisal. However, there are few factors, if given importance, the credit score can improve notwithstanding the fact that self-discipline and payment within time and taking lesser credit can always be helpful in maintaining a healthy score. Here are a few of the basic ways to improve your credit score.
- Repayment of debts and credit card payments within the due dates
- Avoiding any further extension of credit
- Not using the unsolicited new credit arrivals
- Not ignoring the overdue bills
- Keeping open communication with the borrowers and making arrangements for the repayments even in times of financial difficulty
- By being aware of the type of credit card that is in use
- Limiting the number of credit cards and maintaining the existing cards without exceeding the expenditure above 30% of the credit limits
A credit score is something that you cannot neglect and a habit of checking it is perhaps the best way to ensure that you have a good score as you never know when you may require credit. A score of 750 out of 900 is something that is healthy and any bank would be happy to lend you funds with lower interest rates. On top of all, the best way to maintain a good credit score is to nurture good financial habits and not go for unnecessary credits and loans. This will help you in maintaining a good credit score and assist you in availing of lower interest rates when you really need credit.