One of the most crucial factors in deciding whether your loan will be approved or not is your credit score. Read on to learn more.
A good credit score improves life.
This three-digit number has a significant impact on your capacity to reach significant milestones like renting an apartment, buying a vehicle or obtaining a loan for your first house.
Almost every part of your financial life is affected by this score.
Even if you have zero credit history, this guide will cover all you need to learn about credit scores.
Find out how to start building credit, whether you just graduated from high school or are starting later in life.
What is a credit score?
A credit score is a number that tells a person's credit history.
It is also known as the CIBIL score. It might range from 300 to 900.
Credit companies get information on your debts, credit and capacity to repay from banks and other financial institutions.
This information aid in the preparation of the credit report and credit score.
Credit card companies, mortgage and loan lenders and auto dealers frequently use your credit score to decide whether you are creditworthy before deciding how much money to lend you and at what interest rate.
Landlords and insurance companies can check your credit score to see how fiscally liable you are.
Why is it so important to have a high credit score?
If you have a good credit score, you will find it easier to secure loans, as banks and lenders will trust you.
When a borrower has a good credit score, banks are reassured that their money is safe and that they will get it back on time.
Furthermore, if your credit score is near 900, banks will offer you the best credit cards and loans at cheaper interest rates.
Things you didn’t know that can ruin your score
Your credit score is a reflection of your history of fiscal responsibility and good credit management. Here are the top 5 things that impact your credit score:
Your payment history
When you borrow money from lenders, their main concern is whether or not you will repay them on time.
It becomes the most crucial part of your credit score because lenders use it as a measure of your credit score. You can be relied upon to repay loans on time if your credit score is high. Your payment history contains information like:
- Have you timely repaid loans and credit card bills?
- It is essential that you make your credit card payments before the current billing cycle closes. Your credit score may suffer if you continue to make late payments. Potential lenders may see this as a red flag.
- How late are you in paying your bills?
- The more the delay, the more your credit score will suffer.
These questions will make an impact on your credit score the most. You should, thus, start saving now if you want to maintain a good credit score.
Your credit score is affected by a number of variables.
What if, for example, you pay all of your payments on time but are on the edge of financial ruin? Another important component in determining your creditworthiness is your credit use ratio.
Your debt-to-available credit ratio displays how much you owe in comparison to your credit limitations. As a result, a lower credit utilisation ratio is preferred.
If your credit limit is 5 lakhs, try to maintain your credit use percentage around 30%. But don't assume that being debt-free is always better.
To convince the lenders that you are trustworthy and have the financial stability to repay any loans you receive, you must use your credit card frequently and make timely payments.
One way to achieve it is by automating your savings. You can also use a daily savings app to automate your investment.
Tenure of credit history
A long credit history can make it easier for potential lenders to understand your history of financial stability and concerning credit management.
So be cautious to avoid having late payments or other bad marks on your credit history.
It wouldn't hurt to have a short credit history as long as you pay your bills and debts on time and don't owe too much.
Your credit score is impacted by the number of new lines of credit you have.
Your credit report contains details such as how many new accounts you've recently applied for and when you last opened an account, among other things.
Lenders run a hard inquiry whenever you apply for a new credit line (such as student loans, credit cards, mortgages, personal loans and auto loans).
Your credit score may temporarily and slightly decline as a result of the hard inquiries.
If you have a large number of credit accounts, you could be at greater credit risk.
It has been observed that people with cash flow issues apply for an excessive number of new debts, some of which they might or might not be able to repay on time.
The different types of credit you have access to, such as credit cards, store accounts, instalment loans and mortgages, also play an important part in deciding your credit score.
The total number of accounts you have is taken into account when determining your credit score. You shouldn't worry if you do not have any accounts in all of these categories.
Also, avoid opening too many new accounts just to diversify your credit mix because doing so will reduce the average age of your credit history, which could lower your credit score.
Most loan choices heavily weigh your credit score. Therefore, maintaining a good credit score is advised.
You can never predict when you may need a loan. You don't want to be in a circumstance where your score is disregarded.
Due to your poor score, you may be turned down for a loan when you suddenly need one.
Therefore, it is essential to establish and maintain a solid credit profile. If you presently have a poor credit score, put some work into improving it. When you subsequently need a loan, it will be useful.
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