Credit score is a term that we come across quite regularly in banking and business credit dealings. Credit score is an indispensable element of an individual or an organization’s dealings with banks and credit card companies. Hence, for the benefit of people who are freshmen in the financial arena, here is an article that will demonstrate all things about credit score.
A credit score is based on the analysis of a person’s credit report. Lenders, such as banks and credit card companies, use credit scores to evaluate the potential dangers posed by lending money to consumers and to prevent losses due to bad debt. They also use credit scores to work out which applicants qualify for a loan, at what interest rate, and at what credit limit.
The basis of calculating credit score is the credit history. The credit bureau collects all the credit information about an individual in one report to calculate the credit score.
Factors that are instrumental in calculating the credit score are:
- Credit history
Your credit history holds the highest weight while calculating your credit score. How an individual has serviced his/her past debt obligations has a weight of around 30% in credit score calculation. You can also check CIBIL score for free using our smart financial health check tool.
- Credit exposure
The total amount of outstanding credit will decide another 25% of the credit score.
- Other factors
Rest of the factors like credit utilization, recent credit behavior will contribute the rest 20% of the credit score.
Factors that can influence your credit score:
- Delayed payments and defaults
Credit score is calculated basis your credit history. Any default or late payments in the recent past (last couple of years) will affect your credit score negatively as it gives a negative impression about your creditworthiness.
- Higher percentage of unsecured loans
Higher proportion of unsecured loan gives an impression to the credit bureau that you have to service debt with high interest rates. This will consequently result in a lack of creditworthiness as calculated by the credit bureau.
Benefits of a good CIBIL score / good credit score
- To Get Loan Approvals
Once you apply for a personal loan, the lender will check your credit history before giving you the credit. If you have a high credit score, the lender will consider you as “Credit Safe” and your loan application can be accepted after evaluating your repayment capabilities. However, if you have a low credit score your loan application may be rejected immediately even if you have the repaying capabilities.
- To Avail Loan at Lower Rate of Interest
A high credit score can also help you in getting a loan at a lower rate.
- For the quick Disbursal of Loan
A high credit score can assist you in obtaining a loan quicker, so you don’t have to wait an eternity for loans which you need immediately.
Key Points to remember to keep good Credit Score
There is really only one way to keep credit scores high, and that is to avoid late payments. Also it is prudent not to have too many outstanding loans and too many loan requests. If you default on loans from one bank, it will also result in losing your creditworthiness to other banks as well. It will decide not only whether you can get a loan or not, but also if the interest rates that you will have to service will be higher or lower. Even if you are driven by circumstances to miss a payment, monitor your credit score closely so that it does not go down too much and you can make it up later. Maintaining a high credit score is the surest way to financial stability, and it is possible to do that if you keep these simple things in mind.
Also read how credit monitoring works only at Finserv MARKETS
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