A high credit score can be a money-saver, here's why

Radhika Binani

How would you determine your financial health? There are various factors that indicate your financial fitness, some obvious ones are amount of savings, current bank balance, assets etc, others are a little complex like financial portfolio, investments for life goals. However, a crucial facet, which is often ignored, is your credit score.

Your credit score, simply put, is your ability to borrow money from financial institutions that can help you meet life goals like buying a home, a car, meeting your child’s educational aspirations, expanding your business or bail you out in financial emergencies like a medical exigency of a loved one.

For the uninitiated, your credit score is a three-digit number that represents how you have behaved with credit in the past. Paying your credit card bills and EMIs in full and on time, keeping your spends up to 40 percent of your credit limit along with other factors will help you build a high credit score.

On the other hand, defaulting on payments, applying for credit to multiple lenders within a short span of time, spending more than 50%-60% of your credit limit regularly, brings your score down. Now for the lender, this credit score indicates the risk associated with you, when he is processing your loan application.

While, a high credit score raises your chances of getting your loan or credit card application approved, it may help you save money. Here’s how:

Lower interest rates: Several financial institutions have started offering risk-based pricing, which means the interest rates would vary according to the applicant’s profile. If you have a strong profile, that includes a high credit score, you may get offered loans at lower rate of interest. Similarly, since an applicant with a low credit score poses a bigger risk to lenders, they may choose to reject him or offer a loan at a much higher rate of interest. Hence, a high credit score can help consumers get loans at lower rates of interest, thereby reducing the overall cost of the loan.

Credit card benefits: If you have a high credit score, then you would be eligible for more and better credit cards. These cards can endow you with higher rewards on your spends, through benefits like air miles/reward points, cashback, discounts etc, helping you save significant amounts over the long run if used smartly. To make the most of the benefits of a credit card, choose one that offers rewards that suit your lifestyle or spending pattern. For example, frequent travellers can avail free complimentary air tickets or use their air miles/reward points to purchase flight tickets at a discounted price.

Loan balance transfer: Lenders before approving your application for a loan transfer from another lender thoroughly check your credit report along with other factors like monthly salary, employer and other factors. If you have high credit score and have behaved responsibly with the current and past loans, it significantly strengthens your chances of getting your loan transfer application approved and move to a lender which is offering you a lower interest rate.

Choosing to switch to another lender with a lower interest rate may help you save big sums of money over the long run, especially in cases of home loans where the loan amount and loan tenure are big. However, before transferring your loan, borrowers must analyse the benefit of the transfer against the cost.

Differential pricing on fees: While it is rare, lenders sometimes waive off processing fees or other charges associated with a loan, if the applicant has a high credit score. In case, you have a high credit score and are applying for a big loan amount, lenders may agree to waive off or reduce charges.

The writer is Chief Products Officer of Paisabazaar.com