Just like Permanent Account Number (PAN) forms your identity while carrying out any financial transactions, a credit score acts as your identity in the world of credit. Your PAN is required undoubtedly, but your credit score assumes more importance here.
For the uninitiated, a Credit Score is a numerical representation of your creditworthiness. This score is arrived at by giving weight to your past credit behavior. Credit scores are in the range of 300-900, with higher scores indicating higher grades of creditworthiness. The only way you can be eligible for any credit on favorable terms these days is with a good credit score.
You might have read and heard a lot on the need to have a good credit score. Let us go a step further and explore what is in store for you if you are armed with a good credit score.
Lower Rates of Interest: The rate of interest on loans is a deal breaker. Everyone looks for the lowest possible rate of interest on loans/credit cards. From the lenders' point of view, interest is their reward for giving you the loan and taking a risk on it. A good credit score implies that a person has been responsible with credit previously and will possibly do so in future. Therefore, lenders would like to lend to those individuals with good credit score and at a lower rate of interest than the ones offered to individuals with bad credit score. In fact, many banks and NBFC’s have already put this in practice. For Example: For SBI Car Loan Lite, the bank charges an interest rate of 11.4% p.a for credit score greater than 750 and 12.4% for scores in the range of 649-750. Paying 1% extra during the entire term of the loan will be a significant outgo from your pocket.
Better Chances of Loan and Credit Card Approval: The real benefit of credit can be realized if it is approved when it is needed the most. While some loans like the home loans and auto loans are secured by the underlying asset, certain others like personal loans and credit cards are unsecured credit. Therefore, the lender would like to be doubly sure of repayment on time before approving the credit. An individual with a good credit score, therefore has better chances of getting a quicker approval on loans and credit cards.
Additional Reading: How to monitor your credit score?
Enhanced Negotiation Power: Lenders like to lend to individuals with good credit score. So, an individual with a good credit score gets better offers for the products that he needs. This, in turn, gives them a better edge to negotiate with the lender for favorable terms. On the other hand, an individual with a low credit score will hardly see any lenders relaxing the loan terms.
Increased Possibilities of Getting Higher Limits of Credit: A possibility of a higher limit on loans would enable the borrowers to go in for a bigger loan, which will make it possible for them to own bigger assets (a higher-priced home with better amenities, an SUV instead of a sedan, etc). This is possible only when the borrower has a good credit score. No lender in the market would like to lend higher amounts to borrowers with poor credit scores.
There are many advantages to being creditworthy. It could save you some money that you would otherwise pay on extra interest, save time on your approvals, increase your chances of getting approval on larger amounts of loans, and also give you more negotiation power with the lenders.