Your credit score is the 3-digit number that determines whether you are worthy of handling credit. Having good credit health will reap you lots of financial benefits. If you have healthy credit, it can help you get qualified for loans at captivating options like low-interest rates that may save thousands of dollars in the long run. On the flip side, having a low credit score will reap back credit at unfavorable terms or would block the way to access credit to buy a dream home, car, or fund your vacation.
The concept of credit can be complex & confusing, and many do not know where to start and how to sculpt their credit profile in such a way to unlock the best loan offer. First, understand the ins & outs of the credit score concept to build a strong credit profile. Understanding & putting the learning into action will aid in making better credit viable to achieve your financial goals. Read this ultimate guide to get a breakdown of your credit score and how to start building your credit health for better financial soundness.
What is a credit score?
A credit score is a number that ranges between 300 and 900 to depict your creditworthiness. It symbolizes your creditworthiness to repay the borrowed credit. Based on your credit score, the lenders evaluate your capability to repay the borrowed loan. Your credit score determines what kind of credit lines are viable for you in the future. Probably you would get approved for new credit if you have a high credit score. Various factors like how much debt you carry forward, your past payment history, and the type of credit you hold are considered for your credit score. A good credit score will aid you in avail of credit under favorable terms, whereas a fair or low credit score will not get you credit at a lower interest rate and flexible repayment tenure. Generally, a score that should range between 750-900 is deemed an excellent credit score, whereas anything that ranges between 650-749 is a good credit score.
How does A Credit Score work?
In India, your credit score will range from 300 to 900 and calculated by credit rating agencies that maintain your past financial history. The top 4 credit bureaus in India are Experian, TransUnion CIBIL™, Equifax, and CRIF Highmark. The most common type of credit score is the one that is computed by CIBIL™, one of the credit rating agencies in India. When a person makes a purchase using their credit card, inquires about loan details, or avail of a loan, the lender will report the information to the credit bureau.
Factors Go Into Your Credit Score
The following are the factor that is taken into account while calculating your CIBIL™score by credit bureaus:
- Payment History
- Age of Credit
- Credit Exposure
- Types of Accounts You Hold.
What is a Good CIBIL Score to avail of Loans?
A CIBIL™score between 700 and 900 is considered good to avail of different credit lines like a loan & credit card. It has a higher chance of your loan application getting approved. Be it a personal loan, car loan, or home loan you are looking for, a score above 700 is advantageous. You can avail of a loan at good deals such as a lower interest rate, prolonged repayment tenure, and a high loan amount. Moreover, a good score will lead to fast & easy documentation. Remember that the loan amount may differ based on the purpose you mention for the loan and your credit score. In the case of a home loan, you can expect up to 80% of the total cost of the property when you hold a good credit score between 700-900. There is no specific score that qualifies you for a car loan. So, it is advisable to have a score above 700 to stay confident while opting for a car loan.
How To Boost Credit Score?
Maintain a Balance Low:
The overall debt is deemed as a significant factor in your credit score. You must keep it low, perhaps below 30% of your credit score. This means you should utilize approved credit cards to purchase and settle your entire monthly balance.
Pay On Time:
Your payment history makes up 35% to 40% of your credit score. So, you must practice timely repayments to ensure there are no late payment remarks.
How Do Credit Scores Impact Credit Cards?
Credit Card Repayment History:
One of the most significant factors that impact your credit score is repayment history. Your credit score has 35% of Repayment history. Ensure to pay off your bills on time without delay or default payments. Making Late payments or paying only the minimum due could negatively affect your credit score. Even a single default on your card can lower your credit score to a large extent.
The number of Credit Cards:
Many of us may maintain two credit cards to help us increase the amount of credit and reduce the credit utilization ratio. But having too many cards would adversely affect your credit score in case of improper usage. Generally, you must not hold more than three active credit cards for the below reasons:
- It may not help you to keep track of payments on all the cards. This may result in a default in payment.
- If you hold too many cards, the lender may deem you as an extremely credit-dependent person.
As seen before, your credit score would reflect all your credit-related dealings. You must use the credit card properly to balance your CIBIL™score as it is a vital factor while getting a loan approval or grabbing a loan at lower than advertised interest rates.
Credit Utilization Ratio:
Another factor deemed while calculating your CIBIL™score is your credit utilization ratio. The utilization ratio is computed by considering all your total outstanding debt and dividing it by the total available credit. It is expressed in percentages. Your credit utilization ratio must be within 20 to 30%. It should not exceed more than 30% percent.
In case you have a credit utilization ratio of more than 30 %, follow the below-mentioned steps to lower it:
- You need to ask your bank to increase the credit limit on your card. This helps to increase the total amount of credit available. Also, don’t frequently request your lender to increase your credit limit as it would depict you as over-dependent on credit.
- In case you have only one credit card, think about opting for another credit card.
A good credit score is essential as it depicts your repayment to borrow money. Whereas a credit score can deny you getting good financial offers or make your credit costly. It is critical to frequently monitor your credit score. You can check your credit score online for free at the CreditMantri website.
FAQs of The Ultimate Guide To Credit Score: How They Impact Your Credit Card Application
1:Will a credit score be required to avail of Credit Cards?
Most lenders will check your credit score before issuing you a credit card. So, a good credit score will help you get qualified for advantageous cards. The lender chooses individuals who diligently pay dues on time.
2:What Is Meant By Credit Mix?
The credit mix refers to the different kinds of credit accounts you have. Maintaining a healthy mix of secured and unsecured loans will place you on a safer side. Credit mix is taken into consideration while calculating your credit scores.
3:What Is Buy Now Pay Later?
The BNPL stands for Buy Now Pay Later scheme, where you can avail of instant credit similar to a credit card without interest rates. The credit score is not much concerned for the BNPL scheme.