If you are applying for a loan of any kind, having a good credit score is of paramount importance. This is even more so if you are applying for a loan to make a high-value purchase, such as a house/apartment or vehicle.
The importance of credit scores
In India, the major credit reporting companies are Experian, CIBIL, and Equifax, among others. These companies generate credit scores with the help of complex algorithms based on data from banks. These companies are regulated by the Reserve Bank of India.
Your credit score will determine the extent to which banks and other financial institutions deem you eligible to get a loan. It goes without saying that the higher your credit score, the easier it will be for you to get a loan on more affordable and attractive terms.
The reverse is also true. This makes it important to keep an eye on your credit score and make sure that it is within acceptable limits most of the time.
The range of credit scores
Credit scores are normally in a range between 300 and 900. For credit scores that are between 300 and 850, a score of 700 is considered to be pretty good. If this is your score you can congratulate yourself on your astute financial management.
The better your credit score is, the more confidence creditors will have on your repayment ability. Most of the good credit scores fall between 650 and 700, so anything in this range should get you a loan on favorable terms.
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The advantages of having a good credit score
A good credit score can give you the room to negotiate on the terms of your loans. This way, you can hope to get better interest rates and repayment terms.
Even though this is not set in stone, knowing what your credit score is, whether it is good or bad, can help you plan your finances better.
If your credit score is good, for example, you can approach leading banks with the confidence that comes from knowing that you will not be rejected.
However, if your credit score is less than 600 or so, then you can take steps to rectify the score before applying for a loan, thus avoiding the pain of rejection while ensuring that your application will be approved once y
our score is balanced out again.
Credit score calculation
You must be wondering what factors determine the calculation of your credit score. There are weightages for different factors that go into determining your credit score. Your repayment history on existing loans contributes to more than 35% of the weightage of your credit score.
Other factors include your available credit balance in total, the number of credit cards and loans that you have, the amount that you owe in total from all your credit cards and loans, the balance between unsecured and secured loans in your portfolio, your credit utilization habits, etc.
If you aim to maintain a good credit score, it is a good idea to keep an eye on these factors in order to ensure that your credit score does not slip.
Credit score errors
If your credit score is less than satisfactory, before you go into panic mode, check to see if there were any errors in computation. There is no need to take your credit score at face value as credit bureaus can make errors too.
Some of these errors could be an error that arises from the algorithm that is used. Each bank has a specific data set and the report is generated on the basis of more than one data set.
Often, there is a lack in the unique identifiers which results in errors in your report. A more severe error can arise if your identity has been impersonated and a loan is taken in your name, which is then defaulted upon.
This is a serious issue that can be taken up with the law enforcement authorities. One way to avoid this is to prevent identity fraud by protecting your devices and accounts using a firewall or other software.
Sometimes, credit score errors can arise from wrong data that is submitted by the bank to the credit bureau.
The prevalence of such errors is the reason why experts advise people to check their credit reports on a regular basis. You can request to have your credit report from any one of the trusted credit bureaus. While sometimes this report is given free, you may also have to pay a nominal amount.
If any errors are found on your credit report, it can be resolved by contacting the credit bureau in question and requesting a review of your score.
Factors that affect your Credit Scores
Here are some factors affects your Credit Score. They are
- Bill Payment History
- Level of Debt Matters
- Credit History Age
- Number of Credit Inquiries
Factors that doesn’t affect your Credit Scores
Here are some factors that doesn’t affects your Credit Score. They are
- Checking your own credit reports
- Changes in income
- Making charges on a debit card
- Paying small businesses
- Paying someone else’s bills
Remember, a good credit score of 750 and above can give you a whole host of benefits ranging from lower interest rates, a larger loan amount, a longer repayment tenure, quicker loan approval, easier and less documentation, etc.
These are the reasons why it is worth it to manage your financial habits to maintain a good credit score.
The credit score awarded by any of the 4 credit rating companies in India showcases the creditworthiness of a person.
Lenders such as credit card companies and banks determine whether they should offer a loan to a borrower by checking his/her credit score. If an individual has a bad credit score, his or her chances of availing a loan reduces significantly.
Hence, it is important for borrowers to maintain a high credit score by repaying loan EMIs, credit card bills, and other dues on time.
If you want to learn about the steps you can take to improve your credit score, visit the official BankBazaar website.