The feeling of credit, or the perception of buying things on credit, is slowly changing in India. The traditional Indian habit of buying things with cash on hand or on loan is changing and many people are now opting for credit-oriented choices to meet their daily expenses through the use of cash. credit cards, small loans as well as term loans.
When sanctioning a loan or any credit product, the lender will assess the credit rating of consumers. Here’s what you need to know about what a credit score is and why you should maintain a good credit score.
What is the credit score?
A credit score is a three-digit number ranging from 300 to 900, with 300 being the lowest score and 900 being the highest or best score. The score indicates a person’s creditworthiness and lenders use it to make decisions while sanctioning loans or credit cards. The score also reflects the financial credibility of the borrower and his probability of default.
A person with a low credit score will be considered to be at higher risk of default. This means that the lender will either reject a loan application or grant a loan at a higher interest rate.
Currently, there are four credit bureaus in India that provide credit scores to individuals and businesses. They offer credit scores by evaluating a number of parameters such as unpaid debts, repayment history, loan term, credit mix, debt to income ratio, etc. Therefore, knowing how to manage credit and shape your credit history is essential. .
How do you know your credit score?
Finding your credit score is easy. The credit report from the four credit bureaus is free, once a year. It’s a quick and easy step that can be done online. You need to fill in your basic information as well as your credentials like PAN card, Voter ID number, Aadhaar card among other details. It will also have to reveal your past use of credit or loans taken and honored.
What is a good credit score?
A credit score above 700 is considered good and anything above 850 is excellent. A healthy credit score is necessary to enjoy a smooth and hassle-free credit experience. A low credit score can cause difficulty in obtaining a loan.
A credit score varies depending on your credit footprint. Cases such as late payments or skipping a monthly loan payment (EMI) can lower your scores. It is advisable to have and maintain a good credit score so that whenever you need credit, you can do it quickly.
You can also increase your credit score over time. For this, it is important to have a good credit rating and to maintain financial discipline to ensure that it improves over time.
Benefits of a good credit score
A good credit rating means that you are a responsible borrower and likely to make timely repayments. Let’s take a look at some of the benefits of a good credit score:
- Qualify for great credit card and loan offers: A healthy credit rating means that you are a reliable borrower and therefore lenders will want you to be their customer. A good credit score will earn you great benefits on credit cards and loan agreements. This can result in loans with relatively lower interest rates, longer loan terms, and faster penalties.
- Qualify for Upper Limit Approval: When you have a good credit rating, you will see that you are offered a higher credit limit based on each time you pay your existing dues on a timely basis. An increased credit limit means that you can qualify for loans for larger loans and / or for longer terms. It can also result in faster approvals for higher limit loans.
- Allows better negotiation of loan conditions: A borrower gets good credit score after managing credit well. Every lender looks for a borrower who is less likely to default. With a healthy credit history, the borrower is able to negotiate credit terms up to a certain margin to get a good deal.
- Financial stability indication: Since this is an indicator of the health of your financial situation, a healthy credit rating may very well reflect your overall financial life cycle. Some insurers offer customers a good credit rating exemption from certain documentary requirements.
Tips to increase your credit score
Many believe that a bad credit score is a wasted opportunity to resort to credit options. However, your credit score will change over time depending on your credit behavior. Here are some simple tips for getting better credit scores:
- Avoid default values: Your credit behavior is a critical determinant of your potential financial health, and each of your financial footprints is assessed when calculating a credit score. It is essential that you make all your EMI payments on time and that you clarify the contributions appropriately.
By avoiding late payments, defaults, short payments, etc., you can improve your credit scores. This will improve your credit history and lenders will take this as a positive sign assuring them that you will take care of your future debts with greater responsibility.
- Keep an eye on your credit utilization ratio: The credit utilization rate is the ratio of your credit limit to your credit spending. It is the second most important item after credit history. A high ratio will earn you fewer points, hurting your overall credit rating. It is advisable to control the credit limit and secure the credit wisely so that you do not exceed your limit.
- Only opt for loans that are easy to manage: You may come across a lot of quick and easy loan options and great discounts during the sales. Many people make large purchases with down payments on their annual bonuses. While this can work for many, some people may find it difficult to handle too many loans and miss out on an IME. It can affect your credit scores. It is therefore wise to take advantage of credit after careful consideration of its need and its repayment capacity.
- Do not delete your old accounts: A long credit life cycle is a positive indicator of your credit management ability, and lenders pay close attention to your credit history. If you’ve had a credit card with you for a long time, it’s best to keep it and continue to make payments on time. This will reflect well on your credit scores.
Building a strong payment history with a long-standing credit card can do wonders for your scores. In case you have been irregular in your payments, plan how you can avoid it in the future so that you can potentially improve your credit scores.
- Do not apply for several loans at the same time: Plan to have a good balance between unsecured loans like credit cards and secured loans like home loans etc. to improve your scores. Focusing on having more secured loans will bode well for your credit scores.
- Regularly monitor credit reports: Checking your credit scores regularly is a good step in keeping your credit behavior under control. With constant monitoring, you can notice a change in your credit scores and take the necessary corrective course. It will also give you an idea of your credit usage and can point out any signs of anomalies such as unknown transactions.
A credit score will be a benchmark for your credit consumption and a key deciding factor for your lenders to rate you. Often people ignore it until their loan is rejected. Therefore, do not wait to apply for a loan to check your credit scores. It is something that is built gradually and can be improved on a regular basis. Monitor your scores from time to time to have full control over your credit performance.