A credit score is the new GPA or the grading system that qualifies you to avail any loan. According to the industry standards, every adult should maintain their credit score, but not everyone will sue to lack of awareness.
Primarily, an individual should what is a credit score? How does it work? & how will it help him/her? This article helps you understand the difference between myths and facts of credit scores. Also, help you manage your score effectively.
Credit Reports and Credit Scores are not the same.
Though credit score is referred in a credit report, they’re two different entities. The credit report is a clean pure record of your credit history that includes your credit accounts: how many times you apply for credit, debt collection accounts and also some public records, including judgements, liens and bankruptcies.
Now, for you to understand credit score, think of it as a number. Like a grading to all these above factors. This majorly relies on payment history with no dues.
Lenders just look at your credit score before approving a loan with lesser interest. However, credit reports showcase the history of all the history in variations of the credit score.
The 5 factors that influence your score easily.
True, though it is a single number it is quite influenced by several factors.
- Payment history: This refers to how often you have a late payment and is the most important factor, accounting for 35% of your score.
- Credit utilization: This is around 30% of your score and takes into consideration how much of your available credit you’re using. Your credit utilization ratio should be less than 30%, which means if you have an Rs.10,000 credit limit, you’re only carrying a balance of Rs.3,000 or less. Keep in mind this means across all cards, so it’s OK if the individual debt to available credit ratio on a single card is above the 30% guideline.
- The average age of credit accounts: Credit account functionality is judge by how old it is. The older your credit accounts are, the better. This shows a long-term history of responsible financial management and accounts for 15% of your credit score. Say, if your account is 10 years old then it is considered excellent. So, even if you’re not using your first credit card from college anymore, you may want to keep it open to help increase the overall average age.
- Account types: A few revolving accounts such as credit cards as well as instalment accounts such as car and home loans show lenders, you’re responsible for managing multiple types of debt. Your credit mix contributes to 10% of your score.
- Inquiries: When you apply for credit, lenders typically do a hard pull on your credit, which results in an inquiry on your credit report. The more inquiries you have, the lower your score because lenders get nervous when they see someone applying for multiple lines of credit at once. This is the least important factor, however, making up only 10% of your score.
Also Read: Account Aggregator System in India Explained
Easy and free access for your scores & reports.
You’re legally entitled to a free copy of your annual credit report. In many countries, the citizens are provided with one before funding or lending one. That means you can check your credit report every four months if you cycle through the credit apps or offices.
However, here is a golden opportunity for your borrowers, as Buddy Loan provides you with an opportunity to better your credit score with good repayment options.
You can also get your credit score for free from various places. Many major credit card companies offer access as part of their customer perks.
Checking your score will not hinder your score
While it’s true that too many hard inquiries have a negative impact on your score, the effect is small and temporary. There’s also an exception made if you’re applying for the same type of loan in a short period of time, so you can shop around for the best deal on a car loan without worrying about your credit taking a hit. If you’re checking your own score, however, there’s no penalty, and it doesn’t show up on your credit report as an inquiry at all.
Different slabs for score and its’ ranges
Many lenders like banks, NBFCs and common lenders have different slabs to consider the quick loan approval request. However, there are 4 general types that followed across. Buddy offers all types of personal loans whose interest rate is starting from 11.99% p.a. The four slabs for credit score:
You can easily point out the frauds by your credit.
It is easier to keep track of fraudulent practices or identity theft in this digital world. A quick tip to help you safeguard that by drawing a credit report for every once in four months. Most minor changes can help you understand that it is the act of a hacker or fraud.
For example, if you get a notification that your credit score has dropped and seen that there’s a new account you didn’t open or a credit card you haven’t used in months suddenly has a huge balance, you’ll be able to take action immediately.
No friendly interest rate? – It’s time you understood credit score.
A credit score above average will make you get a loan with an interest rate that is fairly heavy with repayment.
The biggest factor in this is the interest rate. As a rule of thumb, the lower your credit score, the higher your interest rate. This can add up to paying thousands more over your lifetime for accessing your credit than you would with a better score.
Even raising your score 100 points or so can save you a lot of money in the future
No. No one can share your credit score.
Though joint accounts can seize your credit growth they will not benefit It the long run. Say, if you’re married or have a joint account or just sharing credit with an authorized user, you are in a soup.
Yet, credit scores are individual, so even if the other person has poor credit and you add them to your credit card, your score won’t go down.
However, if your accountability partner doesn’t pay in due time, the chances are your credit score could get affected. It is easy to make joint accounts but not easy to upgrade your credit through it.
Mistakes don’t last in the credit journey.
If you are worried about the mistakes that led your credit score to drop instantly, please take heart, none of these is going to last. They can be easily made up as you start paying money on time with the loans you avail next.
They are not going to be mentioned later in the credit report.
Keeping up with the credit will eventually erase all your past mistakes of credit earnings.
Credit Score is not the only thing to influence the approval of your loan.
Credit score can impact when you access credit, but it isn’t the only thing lenders consider before approving the loan. There are many bodies in the industries that provide you a loan for low credit score too, thus you can enhance your credit score thereafter.
Do not miss the opportunity to increase your credit score, whilst you learn from your mistakes.
In instances like making a personal request or giving your lender more idea on your credit report can help you access financial products.
They are usually presented in smaller firms like local banks or credit unions, where you can give a clear-cut context to the dispenser. So, that someone in the firm could have seen your entire financial picture instead of just a credit score.