The days when owning a property, gold, or even a car to be considered ‘financially strong’ are long gone. With numerous upgrades to the financial sector, a lot of developments have been witnessed. And one such important change is the evolution of credit scores and their growing significance in the process of lending.
Over the past years, with changing lifestyles, spending habits, mindsets, priorities and perspectives, financial institutions have felt the need to adopt a common metric to assess the creditworthiness of the applicant/borrower. This is exactly the purpose served by a credit score. By displaying your credit repayment history and behavior, it offers a pertinent insight to financial institutions to assess your credit risk i.e. the possibility of default in repayment. Also, while a high credit score can turn out to be a boon for your financial health in multiple ways, a low credit score has the capacity to hurt your financial health.
The benefits of making credit score your best financial buddy include –
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Acts As A Gateway To Higher Loan Eligibility Approval Chances
Whenever you apply for any loan, lenders including banks, NBFCs, Fintech s companies assess your creditworthiness by fetching your credit score from the credit bureaus. It is a three-digit representation of your credit repayment history and is based on the information mentioned in your credit report. A credit report lists a summary of your credit accounts like loans and credit cards including their repayment history, besides maintaining your credit score.
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If you have a credit score of 750 or above, the chances of loan approval are higher, since you are considered financially more disciplined, and hence have a lower risk of default of future payments. Also, since a credit score is amongst the first filters to be factored in during loan evaluations, a good credit score enables higher eligibility and chances of loan approval.
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Lower Rates Of Interest
Lenders have started practicing an approach called risk-based pricing for setting interest rates for loan applicants. A good credit score makes you a customer with a low risk of default and thus they try to entice you and other such borrowers by rewarding their credit discipline with lower interest rates. This constitutes a risk-based pricing model for lenders.
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Enhances Chances Of Maximizing Credit Card Benefits
Other than being just a source of instant credit, credit cards also offer a host of other benefits including discounts, cash backs, reward points, no-cost EMIs, loans against credit cards etc. However, just like loans, credit cards are also a form of credit; therefore, credit card issuers also consider your credit score while evaluating credit card applications. So a higher credit score improves the chances of approval.
Also, a higher credit score can open doors to a series of benefits like fetching a higher credit limit or periodic increase in such limit, availing of better credit cards through offers from other issuers, upgrades from the existing card issuers or qualifying for pre-approved loans against credit card facility as well.
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Access To Pre-Approved Loans
A key benefit of having a good credit score is that it opens the gateway to pre-approved loans from various lenders. These are loans that are pre-qualified in nature and offer in-principal approval to customers with a history of financial discipline. Both your existing lenders and other lenders can pitch pre-approved loans with quicker disbursals, for borrowers with a higher credit score. Further, such loans may also offer benefits including better product features, lower interest rates and lower processing fees.
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Higher Eligibility For A Loan Balance Transfer
Credit score benefits continue even after a loan is approved. During the loan repayment tenure, especially for big-ticket loans like home loans, maintaining a good credit score is really beneficial as it can fetch you better deals on your current outstanding loan, through loan balance transfers. Lenders often entice borrowers with higher credit scores, by offering loan balance transfers at lower interest rates as such borrowers tend to involve a lower credit risk for lenders. This is a win-win situation for both parties involved, as the lender acquires a customer with a good credit profile and the borrower is able to reduce the overall cost of the loan.
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Improving Your Credit Score
The initial step to improving your credit score is to start working towards resolving any disputed transactions that are charged to your credit card but do not belong to you. The users may take the help of credit bureaus who can raise disputes with financial institutions. The next steps involve paying off any delinquent loan EMIs or credit card payments and continuing to make timely payments over a period of time. Also, they ought to steer clear of utilizing the maximum limit on the credit card. Another thing to remember is to avoid shopping for credit by not applying for multiple loans or cards within a short period of time, to strive to maintain a healthy mix of various loans and aim to build a long-term credit history.
The Ways To Improve Your Credit Rating By Taking Conscious Measures To Improve Are
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Set Reminders For Payments And Be Credit Disciplined
Repayment of outstanding debt can have a significant impact on your credit score. This is why you need to maintain credit discipline by ensuring timely repayment of EMIs. Any delay can affect your credit score adversely.
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Maintaining Older Credit Cards To Lengthen Credit History
If you have old credit cards, you should continue to maintain them as long as possible to help in building a solid and lengthy credit history, which helps in maintaining a good credit score.
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Avoid Availing Too Much Credit At A Time
If you take multiple loans at once, it will show that you are trapped in a cycle of insufficient funds, which affects your credit score adversely. On the other hand, if you take a loan and repay it successfully it goes a long way in boosting your credit score.
