Your life is much better with a good credit score, as this 3-digit number affects almost every aspect of your life!
Getting loans of higher amounts for longer tenure with lesser interest rates, premium credit cards offering better rewards and credit utilization limits, and better deals in other financial products- all are easier to avail with a better credit score. A good credit score comes especially useful in case of an unforeseen financial emergency.
And, the best part is that it is not so hard to establish a great credit score, once you understand how it works!
So, let’s delve into its details.
For any of the financial services an institution offers, first, it assesses the creditworthiness of the person soliciting the services. The credit score is a number (calculated as per the algorithmic procedures) expressing how one has managed the credits and debts, and how strong is the candidature of the person asking for the services.
Your credit score is an important parameter of your credit history and can greatly influence your ability to qualify the criteria to avail of financial services!
Credit Score ranges from 300-900 for individuals and 1-9 for corporates, and is calculated from the information found in your credit reports such as the number of credit accounts, timely premium payments, income, account balance, and many others.
In short, it indicates how likely one is to repay the loan/installments.
There are several types of credit scores rolled out by various institutions and the most common type are- FICO Score, VantageScore, and CIBIL Score. There are scores for Individuals as well as Entities.
In general, borrowers having a credit score of (and above) 780 are considered prime, 700-780 are considered good, 600-700 as low, and below 600 as subprime. Similarly, CMR scores published by CIBIL for MSMEs are considered good if they are 1-3, Average if they are 4-6, and poor if >7
RBI has authorized companies that have registered under the "The Credit Information Companies (Regulation) Act, 2005" to provide a credit rating or a credit score based on past performances reported by various member banks and credit institutions. Credit Information Bureau India Ltd (CIBIL™) is India's premier credit information bureau. Experian and Equifax are the other large players operating in India alongside HighMark.
Different credit scores are calculated based on their different criteria but the important factors common to all are as follows:
1. Payment History- this takes into account your timely payments of credit bills.
2. Amount Owned- in this your total loans/credits are compared with the max limits.
3. Length of Credit History- The length of time you have had the credits with you.
4. New Credit Application- How often one applies for/gets new loans is considered.
5. Credit Mix- All the loans, installments, credit accounts, and mortgages are also checked. Secured Vs Unsecured
6. The Total Amount of Debt- How much loan one has taken is also a crucial factor here.
Improving the credit score is mostly specific to the situation and credit history but with some easy steps, a lot of difference in the credit score can be easily created. Some simple steps are:
This seemingly simple step has the biggest effect on your credit score! If you have some payments due, complete them fast and make it your biggest priority to pay all the installments or rentals whatever you have, on time, always. Missing payment of larger dues is also relatively more important than nominal amounts
Most financial experts advise keeping the credit utilization rate below 30% but there is no specific threshold of the percentage where your credits start degrading your credit score. If the balance is being carried month to month then make everything clear before the month ends.
Frequently applying for credits results in some hard inquiries during other loan applications and sometimes even brings down the average age of credit accounts as well. So, only opt for credits or more credits from the same account when you do need them.
From time to time, have a look at your credit reports and update everything that needs rectification. Incorrect information produced at any instant is considered as something fraudulent and greatly harms your credit score. Borrowers can request credit reports from CICs on their own either with no cost or with a nominal fee.
Though a glimpse of this section was delineated in the introductory aspect now let's break down the details.
Whether you are looking for getting a new car, wish to buy or renovate a home, or planning a new business, having a good credit score will not only make it easy to get loans but will also fetch you lower interest rates on nearly all sorts of loans! This can also help get an Instant or STP Sanction compared to a more scrutinized process of Sanction.
In many places, there is credit-based insurance scoring, in which the insurance companies gauge the risk associated with your candidature based on how well you manage your money. In such cases, a good credit score will facilitate better deals in insurance.
The first thing considered before approving the credit card is the credit score! The Card-providing companies tend to offer premium cards with better rewards and facilities to the applicant with higher credit scores only.
A good credit score increases your chances of being eligible for a loan of a higher amount, and also the higher limits on your credit cards. A longer tenure means higher risk for the lender so they offer longer loan periods only for those with a good credit score.
With a good credit score, you are more likely to receive the money when you want it because you are more likely to meet the approval guidelines. So, when any financial emergency arises or even for unforeseen potentialities, the person with a better credit score is mostly safe.
With this comprehensive discussion, you must have mastered the concept of credit score, how it is affected, and how the financial aspects of life are affected by it.
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