The Importance of Credit Score and How to Improve It?

A credit score is a three-digit number that assesses your ability to repay debt. It assesses the probability of your repaying a loan and making timely payments. The greater the score, the more probable it is that you will be approved for loans, so you should always try to receive improved rates. A credit score or CIBIL score depends upon your credit history, which consists of details such as the number of accounts, overall debt amounts, repayment patterns, and additional elements. Lenders utilize credit scores to assess your creditworthiness or the probability that you will repay loans on time. It is computed using a formula derived from details in your credit report. Credit scores generally range from 300 to 850.

Factors affecting credit score.

Various elements can influence an individual’s CIBIL score, including income, age, and job security, among others. Continue reading for more details about the significant factors impacting your CIBIL score. The factors affecting credit score are:

• Loan Repayment Record: If you repay your loan installments timely, it shows that you are a reliable borrower. It improves your credit score, as this is the key element of your credit score or CIBIL score.
• Utilization of credit limit: This is also an important factor to assess your credit score. You should always monitor your credit utilization ratio. There should be a good gap between the overall credit limit and the amount you’ve utilized so far. The more credit you avoid using, the higher your score will be. It is recommended to keep the credit utilization ratio under 30%.
• Mistakes in your CIBIL Report: Any mistakes in your report may adversely affect your score. Therefore, if you notice any mistakes in your report, you should get them corrected right away. Only your lenders can correct these errors. Ideally, you ought to frequently review your credit report to avoid any inaccuracies.
• Timely payment of credit card: Your payment record is one of the greatest factors to affect your score. Timely payment of your credit card bills is important. According to a CIBIL analysis, a 30-day late payment can decrease your score by 100 points. If you possess many credit cards along with loans, it is advisable to put reminders and alerts to avoid missing or delaying payments.
• Exceptional Financial Obligation: It’s important to ensure you have cleared all the existing debts. Having unpaid debts shown on your credit report negatively impacts your score. It is recommended to settle the outstanding payments.
• Credit Rating : When you seek a loan or credit card, lenders evaluate your creditworthiness by examining your credit report, which leads to a time-consuming inquiry. If your recent loan or credit card application is denied, it’s better to wait before reapplying. First try to improve your CIBIL score, then submit your application again.
• Lacking a Variety of Credit: You should maintain a healthy balance between secured and unsecured loans. Home loans and vehicle loans are secured loans, whereas a credit card is an unsecured loan. Having a large amount of just one kind of credit may impact your score. Additionally, possessing a balanced combination of various loan types indicates your proficiency in managing both kinds of loans.
• Shutting Down Old Credit Card Accounts: Credit cards serve as an excellent means to establish credit history. When you shut down your old accounts, you ultimately clean a lengthy credit history linked to your old account. So it is advisable to maintain the old card which you have held for many years. Think about shutting down a card that is new.

How credit score is calculated?

A Credit score or CIBIL score is an important factor that helps you in obtaining loans and credit cards. Financial institutions like banks favour a CIBIL score higher than 750 when considering loan applications. The credit score is a statistical tool which is used to evaluate the borrowers’ eligibility to avail loan. There are few agencies which are responsible to assess your individual report and provide you with the score. Different agencies use different evaluation systems, and the assessment is determined by numerous factors. Various elements contribute to determining your credit score, such as your repayment record, debt utilization ratio, credit history duration, balance between secured and unsecured loan.

These agencies utilize a mathematical equation which is known as a scoring model. This scoring model generates your credit score based on the details in your credit report. Besides credit scores, banks and other financial institutions might also employ various internal scoring systems to determine an individual’s creditworthiness.

Importance and uses of credit score.

Maintaining a high credit score is essential for availing loans and credit cards when acquiring something unique The importance of credit score is not only limited to individuals who are in search of credit but also the score is a deciding factor for many other things.

• Used to assess eligibility for loan: Lenders rely on your credit score to assess your eligibility for mortgages, personal loans, and credit cards, as well as to decide the interest rates you will be charged. The higher credit score are useful to fix your low interest rates.
• Indicates timely loan repayment: A credit score tells your credit habits. If your credit score is good, it indicates that you have probably made loan repayments timely. This information can be derived from your credit report.
•  Helps in deciding type of loan: Lenders rely on credit scores to decide whether you should be provided with a mortgage loan, auto loan, credit card or other loan options. It can also portray your image of very responsible person to potential employers.
• For insurance and tenant evaluation: The Credit score is used for tenant evaluations and insurance assessments. Your good credit score may help you in obtaining better insurance choices and can prove you to be a good tenant.
• Used for deciding interest rates: They are utilized to establish the interest rate and credit limit you obtain. It’s necessary to improve your credit score if it’s on the lower side. When you apply for loan, you won’t be completely rejected if you don’t meet the high standards. In that case, you will be charged a higher interest rate as compared to someone with a better credit score. Therefore, a lower credit score corresponds to a higher interest rate, ultimately leading to an increased monthly payment.

Tips to improve your credit score.

The CIBIL score is essential in evaluating a person’s creditworthiness. A good Credit score makes better loan conditions, the lower interest rates, the increased credit options. By adopting good financial habits and using effective loan management techniques, you can improve your CIBIL score and then you can enjoy the benefits of a strong credit reputation:

• Maintain good loan repayment policy: Regular and timely repayment of loan is important. Adopting this policy shows that you are reliable and responsible borrower which improves your credit score.
• Avoid being a guarantor: If you give guarantee of any such person who is not reliable, in that case if the primary borrower fails to pay, your credit score will be impacted negatively. So, it is recommended to give guarantee only if you are confident in the borrower’s financial stability and ability to repay.
• Avoid taking out several loans at a time: If you request several loans in a brief period, it may be viewed by lenders as an indication of financial instability. This will potentially impact your credit score and finally your credit score will be decreased.
• Raise your credit limit: You should keep your credit card limit as high as possible. But remember that this increased credit card limit does not mean to spend more. You should keep your spending constant and low. Then you can reduce your credit utilisation ratio. This decreased ratio will finally result in a better credit score.
• Keep the credit card ratio consistent: You should check your credit score, which is very essential. At the same time, you should also understand its limit. It is advisable to maintain your credit utilization ratio under 30% of your available credit limit.
• Settle your debts without delay: You should always make fast payments for your credit card bills and loan EMIs. It is very essential, as late payments significantly harm an individual’s credit score.
• Keep an eye on your credit card transactions: You should consistently check your credit card statements and credit reports, as it can assist in spotting mistakes or unauthorized transactions, which can negatively impact your credit score. It is important to take quick action on any inconsistencies.
• Restrict applications for additional credit: If you apply again and again for a loan and your loan application is rejected after the loan inquiry, every credit inquiry might slightly lower your score. Therefore, it is important to restrict the number of new credit applications to preserve a consistent credit score.
• Guarantee quick repayments: If you make credit payments punctually and regularly, it is among the most essential elements in improving your credit score.
• Choose extended loan durations: You should try to opt for an extended loan term. It decreases the monthly payment load and facilitates timely fulfilment of repayment responsibilities. But at the same time, this results in paying higher interest throughout the loan’s duration; it helps in preserving a good credit history.

Conclusion.

When you take out a loan, the lender is likely to check your credit score first. Credit reports and credit scores serve as indicators that enable a financial institution to assess your trustworthiness for repaying debt punctually. The importance of a good credit score can only be understood when you see the benefits of maintaining a good credit score. You need a loan when you go to start any business, or you want the destination wedding; you want a huge amount for education or any other type of expenses. Possessing a strong credit score will assist you in obtaining loans with ease, as you will be viewed as a lower risk. You will be required to settle your debt at reduced interest rates. Take important actions to improve your credit score to access the best personal loans.