A credit score is a quantified representation of your creditworthiness. It ranges from 300 to 900. The higher your score, the lesser risk you pose to a lender disbursing a credit.
The credit score is calculated based on several parameters, including your credit history, FOIR, credit mix, and other factors. A score beyond 750 is usually considered as an excellent credit score as it assures the lending institutions that you are less likely to default on your bills or instalments. There are numerous benefits to having a good credit score; in most cases, a credit score of 300 to 500 is considered poor.
In our country, these scores are evaluated by the Credit Information Bureau of India Limited (CIBIL). They collect the information of individual borrowers and compile their records to create a reliable source to judge creditworthiness for various financial institutions.
Benefits of a good credit score
1. Approval of loans
You are likely to have a higher chance of loan approval if you have a credit score of 750 or higher. Also, you can get unsecured loans such as personal loans. Such loans usually come with no end-user restrictions allowing you to use the funds in whichever way you require. Also, with a good credit score, you can get higher loan sum as compared to an applicant with a lower credit score. It is because you pose less risk to the institution and have a higher chance to repay the debt without defaulting on the payment.
2. Approval of credit cards
A good credit rating ensures the institutions of your creditworthiness and increases the likelihood of availing financial tools like a credit card without much hassle. These credit cards can have a high limit if you have greater income and repayment capability.
3. Lower interest
In case you are availing a loan, you will be offered comparatively lower interest rate if you have a good credit score. It happens because your credit score shows how much risk you represent for the lenders. However, your personal loan interest rates may also depend on a few factors other than a good credit score, like monthly income, and obligations to income ratio, etc.
4. Higher rewards
Having an excellent credit score allows you to opt for financial tools such as credit cards that offer better rewards. There are credit cards which offer Joining bonuses and rewards as well as cashbacks, discounts, and customer loyalty bonuses like reward points.
5. Pre-approved offers
NBFCs such as Bajaj which provide pre-approved offers to customers. These offers simplify the process of availing a credit, allowing you to save time during the process.
How to improve your credit rating
1. Due payments
One of the most obvious ways in which you can improve your credit score is by paying your dues on time. This establishes you as creditworthy and significantly improves your credit score. It is also important to pay your dues in full rather than trying to settle for minimum amounts if you are using credit cards. It can have an adverse effect on your credit score.
2. Keep credit balances low
It reflects positively on your credit score when you use less than or equal to 50% of your credit limit. You can utilise funds availed from a loan for only your essential requirements to keep the utilisation rate below 30%. This can increase your CIBIL score as it shows that you are not credit dependent. In case you have incurred a huge credit card bill you can take a personal loan to repay that. It also improves your credit rating.
Having a good credit score significantly affects your financial well-being and chances of availing an advance in future. Therefore, it becomes a must to check credit scores regularly to see how you are doing in that front.