Importance of Credit Score

Understanding the importance of credit scores has become crucial to effectively managing financial activities, as lenders use this score to assess the risk of lending to you.

A higher score often leads to lower interest rates, while a lower score may result in higher rates or even loan rejection. Most banks and NBFCs prefer credit scores above 750 as it represents a good payment history, which increases the repayment capacity.

Learn more about CIBIL score importance, factors that affect your credit score, and more!

Table of Contents:

• ⇾ Impact of Credit Score on Your Financial Life
• ⇾ Credit Score Range & Significance
• ⇾ 
Impact of Credit Scores on Different Loans & Credit Cards
• ⇾ Factors Affecting Your Credit Score
• ⇾ Advantages of a Good Credit Score
• ⇾ Common Mistakes That Lower Credit Score
• ⇾ Tips to Improve Your Credit Score
• ⇾ Frequently Asked Questions

Impact of Credit Score on Your Financial Life

Credit scores are considered to be representations of an individual’s repayment ability and payment history. It serves as a crucial factor that influences various aspects of your financial life, particularly regarding loan and credit card approvals, as well as the terms associated with them.

Have a look at each of them:

1. Loan Approvals and Interest Rates: Lenders usually assess credit scores to determine the loan applicant’s eligibility. A high credit score helps in faster loan approval and access to low interest rates.

A low credit score can result in loan application rejections. In the case of approvals, the interest rates are higher due to the increased risk.

2. Credit Card Approvals and Limits: A strong credit score also speeds up approval rates for premium credit cards with higher limits and better rewards.

A poor credit score may lead to application rejections or low credit limits.

3. House Rentals: Sometimes, property owners may ask for your credit score to evaluate rental applications. High credit scores indicate strong financial responsibility, which increases approval chances.

Credit Score Range & Significance

The table below shows the credit score range and how it can help assess your financial health and improve your credit profile.

Impact of Credit Scores on Different Loans & Credit Cards

In India, the credit score typically ranges from 300 to 900 where the higher the score, the greater the benefits.

Hence, it is important to note that your credit has a major impact on your eligibility for various financial products such as credit cards and loans.

Here’s how:

• Home Loans: High credit scores lead to low interest rates. Lenders may therefore offer higher loan amounts to individuals with excellent credit histories.
• Personal Loans: These can be easily accessed with high credit scores, as it lowers the risk on your end as a borrower. It also leads to quicker approvals and lower interest rates.
• Credit Cards: The importance of credit score on a credit card is based on the card type. That is, if you want to avail premium credit cards, a high credit score is necessary.

Whereas, basic credit cards with limited benefits can be accessed with a low credit score.

• Auto Loans: These are secured loans designed to meet the financial needs that come with buying a car or any other vehicle. For individuals with high credit scores, a large portion of the car's will be covered.

Those with lower scores may need to pay a bigger down payment and higher interest rates.

Factors Affecting Your Credit Score

Various factors can influence your credit score. These include:

• Payment History: Missed or late payments can significantly lower your credit score. Hence, it is important to maintain a good record of your bill payments.
• Credit History Length: A longer history proves responsible use of credit. The duration your credit accounts have been active contributes to your score.
• Credit Use Rate: Also referred to as the credit utilization ratio, it refers to the amount of credit used with respect to your total available credit. High utilization rates can negatively impact your score.
• Credit Mix: Using only 1 type of credit account will not increase your credit score. With various types of credits and loans and on-time repayments, you can boost your credit score.
• Multiple Applications: Frequently applying for credit cards and loans can lower your credit score. Ensure to check your eligibility before applying.

Advantages of a Good Credit Score

Below are some of the top advantages of maintaining a strong credit score in the long run:

• Individuals with high credit scores can easily get their loans approved.
• A good credit score makes it easier to access premium credit cards that offer better rewards, benefits, and features.
• High credit scores can result in low interest rates for loans and insurance.
• Banks may offer higher credit limits to those with good credit scores, which increases financial flexibility.

To obtain and maintain a good credit score, below are some of the usual mistakes you can avoid.

Common Mistakes That Lower Credit Score

Here are some of the common mistakes that can affect your creditworthiness and credit score:

• Late or missed repayments can lower your credit score as it is reflected in the payment history.
• Closing old credit accounts can shorten your credit history and reduce your available credit, which lowers your score.
• Not fixing your credit report errors can lead to a lower score.
• Multiple credit applications can result in increased inquiries and affect your credit score.
• Paying only the minimum amount can increase debt and interest, affecting your score.

Tips to Improve Your Credit Score

Now that you know the role of credit score in your financial health, here are some of the measures you can take to boost your credit score:

• Ensure to pay all your bills on time, particularly EMI as timely payments boost your credit score.
• Maintain low credit utilization to show responsible credit usage.
• Ensure to have various types of personal loans and credit cards as it displays your ability to manage various credit types.
• Keep your old credit accounts as it helps maintain a longer credit history.
• Regularly review your credit report to identify and correct any inaccuracies, ensuring your score reflects accurate information.
• Do not apply for multiple credit cards in the same time period as it can result in a hard inquiry and lower your score.