What is Credit Score & Why it is Important?

When you apply for a loan, the first thing lenders do is ask for your permission to check your credit history. So, what exactly is a credit score, and why is it so important to banks and lending institutions?

The credit score is one of the most important factors that banks and financial institutions consider. As a result, it is critical for borrowers to keep a close eye on their credit score in order to be approved for their desired loan or credit card.

Let’s talk in detail about what is a credit score, why it’s important, and how it’s a major deciding factor when it comes to getting approved for a credit card or a loan.

What is a Credit Score?

A credit score is a numerical representation of a borrower’s credit history. The credit score is generated on the basis of multiple factors such as pending loans, credit card’s transaction history, credit repayments, etc. Based on these and other factors, banks and lending institutions decide whether or not to approve the borrower’s loan or credit card application

  • A credit score is a three-digit number that ranges from 300 to 900
  • A number closer to 900 is considered best whereas a number that is lower than 650 is considered questionable and requires one to work hard to get the desired loan or credit amount
  • To obtain the desired loan amount at a lower interest rate, it is important for an individual to strictly maintain a good credit history
  • Credit history is used by banks, financial institutions, lenders, and others to determine whether or not to grant a loan or credit card to the applicant
  • Even though there are numerous other factors considered while approving a credit card or loan application, the credit score is the most important

What is a Good Credit Score?

The higher a borrower’s credit score, the better. The following are the specifics of credit score values and their implications:

CIBIL ScoreCredit Score Health
300-549A low CIBIL score indicates irregular payment history
Payment failures
High reliance on credit
The possibility of becoming a defaulter
550-649Fair CIBIL score
Payment irregularities
Too many hard inquiries
650-749Acceptable CIBIL score
Strict and responsible payment practises
Credit history free of errors
Eligible for credit cards & loan
Lesser risk of turning into a defaulter
Higher interest rate
750-900Excellent CIBIL score
Payments are made on time and in a responsible manner
There are no late payments
There is no outstanding balance
High negotiation capabilities
Lesser interest rate
Clean credit history
Error-free credit history

Why Do You Need a Good Credit Score?

The following are some of the advantages of having a good credit score:

  • Low interest rates

Having a good credit score on your side allows you to qualify for low interest rates on loans and credit cards, making it easier for you to pay back the money. As a result, if you intend to apply for a loan or a credit card, make it a habit to check your credit score on a regular basis.

  • Instant loan & credit card approval

A good credit score demonstrates the borrower’s creditworthiness; hence, users with a good credit score enjoy the timely approval of loans and credit cards. Borrowers with low or poor credit scores are frequently turned down by lenders, banks, and financial institutions because their credit history cannot be trusted.

Even if you have a good credit score, there is no guarantee that you will be approved for a loan or a credit card. It is important to note that when borrowing money or getting a credit card, certain other factors are taken into account.

  • Negotiation power

A credit score of around 900 is considered excellent because it gives you the ability to negotiate the interest rate on loan amount or credit card limit. This implies that a high credit score has the potential to increase a borrower’s bargaining power. Besides this, having a good credit score allows the borrower to take advantage of special discounts, deals, and offers.

  • Higher approval amount

Depending upon the borrower’s credit score and income, banks and lending institutions decide the loan amount to offer to the borrower. Having a good credit score on the side allows the banks to lend a higher loan amount to the borrower. However, in situations when the borrower asks for a higher loan amount but has a low credit score, he/she may get it approved at a relatively higher interest rate.

  • Acquiring the best credit cards

A good credit score qualifies you for the best credit cards on the market. These cards have the lowest interest rates, rewards, deals and discounts, cashback offers, and much more. Next time you consider getting something good with a lot of benefits, make sure you are in the habit of paying your credit card and loan EMIs on time.

What Factors Influence Credit Score?

A borrower’s credit score is affected by various factors. However, if these factors are addressed, they can also produce positive results. Here’s how it works:

  • Payment History

Your payment history reflects how diligent you are about repaying loan EMIs or credit card balances. Any late payment, overdue amount, etc. will have an immediate impact on your credit score. Because lenders and banks prioritize the user’s credit score before beginning the loan approval procedure, it is critical to develop the habit of making EMIs and credit card balance payments on time.

  • Credit Utilization Ratio

The Credit Utilization Ratio (CUR) is the amount used out of the total credit amount provided by the bank. Spending around 30% of your total credit limit is considered appropriate. However, expenses that are greater than or equal to the given amount have a negative impact on the credit score. This is because spending too much on your credit card demonstrates that you rely heavily on it. Hence, it is advised to use CUR according to the requirements.

  • Credit Types

There are two types of credit accounts: revolving accounts and installment loans. A balance between these two types of accounts aids in credit score improvement. The balance is important because it demonstrates how you manage both accounts and accept responsibility for them.

  • Credit Inquiries

A credit inquiry basically refers to a credit check. A credit inquiry is made every time a user submits a credit-based application. When a consumer checks his/her credit report, it is said to be a soft inquiry, which does not impact the credit score. However, inquiries that are made by the lenders when consumers apply for credit are not soft inquiries. When such inquiries are made multiple times, within a short span of time, it hampers the borrower’s credit score. Hence, it is advised not to make unnecessary inquiries about new loans or credits.

How Can I Check My Credit Score Online?

Borrowers can check their credit score using a variety of financial applications. It is also recommended that you monitor your credit score and determine whether you need to maintain or improve it.

Paytm is one such mobile application that allows you to check your credit score in three simple steps:

  • Log in to the Paytm mobile app.
  • Go to ‘Loans and Credit Cards.’
  • Select ‘Free Credit Score.’
  • Check your credit score for free

Get Your Credit Score

Are there any fees associated with generating credit scores?
No, there are no fees associated with generating credit scores. You can check your credit score for free online. There are numerous mobile apps and websites that allow you to generate your credit score for free. One such application is Paytm.
Why is a credit score so important?
A credit score is one of the most important factors to be considered while applying for a loan or starting with credit card operations. Even though the credit score is not the only parameter that decides your loan or credit card approval; however, it remains one of the most important factors. Any bank, financial institution, or lender will take the first look at the credit score of the applicant before providing them with the desired loan.
How to improve my credit score?
You must do the following to improve your credit score:
  • Pay bills, credit card balances, and loan EMIs on time
  • Do not postpone your payments
  • Maintain a clean, strict, and error-free credit history
  • Maintain a healthy balance of secured and unsecured loans
  • Don’t perform too many credit inquiries
  • Try not to leave any unpaid loan balances
  • Maintain proper credit utilization ratio usage
  • To avoid late payments, set up timely reminders for your due dates
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