Know the importance of the Credit Score

A good credit score can go a long way in helping you build wealth

Know the importance of the Credit Score

image source : reuters

Know the importance of the Credit Score

Over the past few years, credit scores and credit reports have become pretty important discussion point in India. People, especially in the urban areas, are waking up to the importance of credit score and maintaining it. In fact, according to a recent survey conducted by TransUnion CIBIL, 74% of the respondents surveyed in the country admitted to checking their credit score at least twice a year. The primary reason for such interest was either to improve the score or preparation for a new home or car loan.

So, what exactly is a credit score and how is it calculated?

Basically speaking, a credit report of an individual is the history of the financial transactions done by the said person. These would essentially contain details about the loans (personal or home) and credit card payment history. There are three credit bureaus in India that compile such reports, namely, CIBIL, Equifax and Experian. The composite score for each individual is arrived based on a list of parameters, like payment of EMIs, credit card bills, credit history, usage of credit limit, etc. All the lenders and bankers typically share the data with these credit bureaus, which then create the score.

Planning To Avail A Home Loan? 9 Things You Must Know

Typically, a credit score is a 3 digit number from 300-900, wherein the higher the number the better the score. While different bureaus like CIBIL and Equifax might have different scoring algorithms, they tend to be in the same range. But then, as each of the bureaus give different weigtage to different parameters, the scores could be pretty different.

Here's how the scores are related to the financial health of an individual.

  • 300 and 580 - Considered bad, loans would be denied or granted at very high interest rates

  • 581 and 650 - Not very good, loans might get approved but interest rates would be high

  • 651 and 710 - Fair, loans would be approved with moderately high interest rates

  • 711 and 750 - Good, loans would be approved at market rates

  • 751 and 900 - Excellent, loans will be instantly approved at low interest rates

Thus, the higher the score, the easier it is to get credit cards or loans sanctioned. A lower score can result in denial of loans or higher interest rates.

How can credit score be improved?

Now, that you know the correlation between credit history and credit score, here's a simple way to improve them:

  • Pay your bills on time

  • Clear out any old loan or credit card payments

  • Don't utilise the complete credit limit

  • Pay EMIs for loans on time

  • Do not apply for multiple credit cards or loans

In the end, maintaining the financial health is equivalent to maintaining your physical health. To be healthy, one needs discipline and exercise, similarly to have a good credit score, one needs to pay attention to all the financial parameters. According to the CIBIL survey, surprisingly 62% of Indian respondents didn’t know that lenders check consumer credit scores in order to determine the terms of a loan, and neither were 63% aware that mobile contract providers may use CIBIL scores to set post paid credit limits.

Don't forget, a good credit score can go a long way in helping you build wealth. So, don't forget to check the scores at regular time period.

your voice