Synopsis: This article gives us a brief introduction to how credit scores work, what affects it, and why it is important to maintain a good credit score.
Financial literacy in this digital era is more important than it was before. There is talk of credit cards all around the channels but the most important takeaway is to have an understanding of the credit scores and how it works. The three digit number plays the most crucial role between the lender and the taker. These numbers usually range between 300-900 and based on your report the decision would be taken by financial institutions.
How Credit Scores Work
This three digit number conveys the message to the banks whether the applicant is credit worthy or not. The scores are basically the result of the credit report. This report for every individual is calculated based on their credit history such as how long one has been using a particular card and how has been the relationship in repayments with the bank. This eventually leads to the result in the credit report and thus with the report each person gets their credit scores.
The credit scores are necessary for various reasons. One is – if you have a credit score that is nearing 750 this means you are in the very good category and thus getting a credit would be easier for you. However, if you have a number which is below 400 this means that you are not a reliable person according to financial institutions and would not be lent a sum.
What affects your score
1. Not Paying Bills On Time
It is for the best interest of the individual that their repayment history is clean or says they have paid bills before the billing cycle. If a person delays to pay back the credit amount then it will result in decrease in the credit scores. If a person maintains good and timely repayments it will add on eventually to earning more score.
2. Having Different Kinds of Loans
Loan accounts affect credit scores through repayment history and the number of inquiries. If an individual has many loan accounts and the repayment history is negative then this signals that the financial management of the person is poor. Hence, decrease in the credit score. However, if one individual has several loan accounts and with enough lump sum still they don’t have any inquiries (inquiries are done by credit bureaus for late payment) it will result positively in the overall credit score.
3. Closing your old account
This is where the person’s first ever credit card value pops up. If an individual has a card from the very beginning and has been using it for a few years without any fail with the repayments and financial cycles this results in the person being seen through a lens of trust and worthiness. If a person closes their account after using it for years then it will erase all the credit score history and thus will result in the person being in the spot that is similar to a newbie in front of financial institutions.
4. Utilizing more than credit limit
There is a golden rule when it comes to using the balance with credit cards and that is to use less than 30% of your total credit limits. If you have a credit card with a ₹1 lakh limit then try not to carry a balance higher than ₹30,000. This affects the credit score in the way that it signals that you are a mindful person even with a heavy amount of credit available.
5. Applying for New Credit Cards
If you apply for many credit cards at once or in a short period of time, it eventually hits your credit score as it signals that you are in desperate need of money. This significantly lowers your credit score and rebuilding it may take time. You can apply for new cards when you have a good credit score and the history is nearly fair and upon receiving it, if you maintain the same financial habit of paying credit card bills on time would help in increasing the credit score eventually.
Also Read: Credit Card vs Debit Card: The Key Differences Every Consumer Should Know
Conclusion
It is important to note that there is not just one credit score but many. Each depends on the individualistic data used to calculate and it may differ based on the scoring model used. Scoring models also depend on the type of loan product and how the score is used. Overall a higher credit score makes it easier to qualify for financial loans and also may grant a better interest rate.
Written by Kenbi Riba
