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Understanding Credit Score – Importance, Unknown Facts & What to avoid

clixcapitalwp October 28, 2020

Credit Score Simplified

Whether you’re applying for a credit card or a personal/home loan, you’d have often heard the term ‘credit score’. Hearing it in passing references is one thing but understanding it to benefit you is important.

It is a vital, 3-digit number that marks your creditworthiness. Simply put, it is the numerical analysis of your credit behavior for the past few years. If your credit report reflects responsible financial actions as timely bill payments, regular loan EMI payments, lesser loan applications, and an error-free profile; it goes on to show that you’ve been sincere while dealing with credit.

Credit score ranges from 300-900 and a score of 700 and above is considered good. Banks and lenders usually choose to sanction loan approvals to individuals with a credit score of 700+ as they can be trusted with the money.

Although, you can still manage to get a credit card or loan approval on a low credit score, the rate of interest levied would usually be much higher than average. If you want to secure a loan with an affordable rate of interest, you must work on improving your credit score.

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Credit Score Ranges

To interpret your credit score better, you need to first understand what the different credit score ranges are. All credit bureaus follow their own credit scoring system based on their scoring model. The credit score range followed by Experian is as below:

Credit Score Range Rating
300-579 Very poor
580-669 Fair
670-739 Good
740-799 Very good
800-850 Exceptional

Why Having a Good Credit Score is Important?

An excellent credit score benefits you in the following ways:

    • Better chances of getting a credit card/personal loan approval.
    • Gets you approved for higher credit limits.
    • Gets you instant pre-qualified personal loan offers.
    • Helps you in availing lower interest rates.
    • Helps in getting easier and faster business loan approvals
    • Plays an important role in getting a hassle-free approval on home loan.

Things to Know About Your Credit Score

You need to keep in mind that no credit transaction will go unrecorded in your credit report. To comprehend your credit score better, you need to know a few facts around it. Here they are:

    • Your credit score is individual and unaffected by your income, savings, and investments. It is simply a numeric tally of your debt activities – payments and credit applications, that go on to establish the nature of debtor you are.
    • Checking your own credit score doesn’t affect it any way. You should check your credit score online periodically to look for errors or incidents of fraud in your credit report.
    • Although defaulting on loan EMIs and credit card payments is never advised, your data is never made public on any forums. It is only made available to the concerned companies enquiring about your credit score for a purpose.
    • Though credit score is the first impression that you leave on a lender but it is not the sole dictator in getting you a loan approval. There are several other factors in play for the purpose.
    • Credit payments and default in transactions made over 10 years ago will not form a part of your credit report.
    • Although you’ve adequate income to apply for credit, too much credit eventually damages your credit score. Always borrow only what is necessary.
    • Your credit utilization ratio has a direct impact on your credit score. The closer you get to your maximum available credit limit; the more likely it is that your credit score will be affected.

Weighted Factors Influencing Your Credit Score

Building, protecting, and maintaining your credit score is important than ever. It all lies in how well you manage the following factors that affect your credit score:

    • Credit Payment History – An important element, payment history determines 35% of your credit score. How frequently and timely you pay your bills and loan EMIs comes under the purview of payment history. Needless to say, this affects your credit score more than anything else.
    • Quantity of Debt – Your level of debt, 30%, is yet another important factor that affects your credit score. This implies ratio of your overall credit balances and the amount of credit spent, also called as credit utilization ratio. Keep your credit utilization ratio to 30% or less to avoid affecting your credit score negatively.
    • Average Length of Credit History – The average age of your credit accounts forms 15% of your credit score. It takes into account the age of your oldest credit account and the average age of all credit accounts held till date. This stresses the fact that you should keep your old credit cards going, even if you don’t use them.
    • Types of Credit – Type of credit accounts held forms 10% of your credit core. Two types of credit accounts exist – revolving and instalment accounts. Having both on your credit report is good for your credit score.
    • Number of Credit Inquiries – Credit inquiries make up for 10% of your credit score. Each time someone pulls out your credit report, a hard inquiry is generated. However, contrary to popular notion, checking your own credit score doesn’t affect it.

A better understanding of how credit score works and the credit behavior affecting it will ultimately help you take your credit score upwards. Check your credit score online to unleash better credit options and great opportunities.

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