What is Credit Score & Why it is Important?

byPriyanka JuyalLast Updated: May 16, 2023

A credit score refers to a numerical representation of an individual’s creditworthiness and payment history. This metric holds significant importance for banks and lending institutions as it helps them assess the risk involved in lending money to a borrower. Therefore, borrowers must maintain a good credit score to increase their chances of getting approved for loans or credit cards.

This article will delve into the specifics of what a credit score is, its importance, and how it influences the approval process for credit cards and loans.

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 transaction history, credit repayments, etc. Based on this and other relevant information, lenders determine whether to approve or reject a borrower’s loan or credit card application.

  • Credit score is a 3-digit number that ranges from 300 to 900.
  • A higher credit score closer to 900 is considered the best, while a lower score below 650 is viewed as questionable.
  • Individuals with a low credit score may have to work hard to improve it to secure desired loans or credit amounts.
  • Maintaining a good credit history is crucial for individuals to obtain desired loans at lower interest rates.
  • Banks, financial institutions, and lenders use an individual’s credit history to decide whether to approve their loan or credit card application.
  • While there are other factors considered, the credit score is the most critical factor in the loan or credit card approval process.

What Is a Good Credit Score?

A good credit score is typically considered to be a score of 670 or higher. However, different lenders may have different criteria for what they consider to be a good credit score. Generally, a higher credit score indicates that the individual is more likely to repay their debts on time and is a lower risk for the lender. This may result in better loan or credit card terms, such as lower interest rates or higher credit limits.

What Are the Benefits of a Good Credit Score?

Having a good credit score can provide several benefits, including:

  • A good credit score can make it easier to get approved for loans, credit cards, and other financial products.
  • It can also result in lower interest rates and better terms on loans and credit cards.
  • A high credit score can lead to better insurance rates and rental opportunities.
  • It demonstrates responsible financial behavior and can lead to greater trust from lenders and financial institutions.
  • A good credit score can also improve your chances of getting approved for a mortgage or other significant loans.

Why Do You Need a Good Credit Score?

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

  1. Access to Low Interest Rates
  • A good credit score qualifies you for loans and credit cards with lower interest rates, making it easier to pay back the money.
  • Checking your credit score regularly can help you ensure that you maintain a good credit score when you need it.
  1. Instant Approval for Loans and Credit Cards
  • A good credit score demonstrates creditworthiness and can lead to quicker approval for loans and credit cards.
  • Borrowers with poor credit scores may be turned down by lenders, banks, and financial institutions because their credit history cannot be trusted.
  1. Negotiation Power
  • A high credit score gives borrowers the ability to negotiate better interest rates on loans and credit card limits.
  • Borrowers with good credit scores may also qualify for special discounts, deals, and offers.
  1. Higher Approval Amounts
  • Banks and lending institutions decide the loan amount to offer based on the borrower’s credit score and income.
  • Having a good credit score increases the chances of getting approved for a higher loan amount.
  1. Access to the Best Credit Cards
  • A good credit score qualifies you for the best credit cards with low interest rates, rewards, deals, discounts, and cashback offers.
  • Paying credit card and loan EMIs on time can help maintain a good credit score and ensure access to the best credit cards.

What Is the Use of a Credit Score?

Credit scores have several important uses, including:

  • Loan Approval: Credit scores are used by lenders to determine whether to approve loan applications, as they reflect the borrower’s creditworthiness and ability to repay the loan.
  • Interest Rates: Credit scores influence the interest rates offered by lenders. Higher credit scores often result in lower interest rates, saving borrowers money on interest payments.
  • Credit Card Eligibility: Credit scores impact the approval and terms of credit card applications. A good credit score increases the likelihood of being approved and may lead to better credit card offers with higher limits and more rewards.
  • Rental Applications: Landlords often consider credit scores when evaluating rental applications. A good credit score can improve the chances of securing a rental property and negotiating favorable rental terms.
  • Insurance Premiums: Credit scores can affect insurance premiums. A higher credit score may lead to lower insurance premiums, as it indicates a lower risk profile to insurance companies.
  • Employment Considerations: In certain industries, employers may review credit scores as part of the hiring process, particularly for positions involving financial responsibilities.
  • Utility Service Approval: Utility providers may consider credit scores when determining whether to approve applications for services such as electricity or internet. A good credit score can facilitate faster approvals and avoid security deposits.

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 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?

Checking your credit score online has become convenient with the availability of various financial applications. Monitoring your credit score regularly is crucial to assess your financial standing and identify opportunities for improvement.

Paytm, a trusted mobile application, offers a user-friendly process to check your credit score in just three simple steps:

  • Log in to the Paytm mobile app.
  • Navigate to the ‘Loans and Credit Cards’ section.
  • Choose the option ‘Free Credit Score.’
  • Access your credit score without any charges.

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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