Finance is pretty confusing, especially for a first-time borrower in India. Nevertheless, there is one thing you simply cannot afford not knowing: your credit score. Your credit score is, in effect, the report card of how you live your financial life. Indeed, it holds severe implications concerning your loan applications besides your getting credit cards and rental agreements. Worry not! This guide breaks down the concept of credit scores in a friendly, non-technical way to help give you a good grip on just how important they are for you and then just how to improve your score.
What is a Credit Score?
It essentially shows you how credit-worthy you are, scoring between 300 to 900 points, the higher the score. Indian credit bureaus like CIBIL, Equifax, Experian, and CRIF High Mark calculate your score based on what you have in your credit history, such as borrowing and paying money over time.
What Goes into a Credit Score:
Your credit score is way more than just some floating number-it’s built on many factors:
1. Payment history: This is the big one! It reflects whether or not you pay your bills on time. So, if you missed accounts or payments, this can really go poorly for your score.
2. Credit Utilization Ratio (30%): The amount of money available in credit and the amount that you have utilized ideally should not cross 30%. Okay, let me give an example. For you, the credit limit may be ₹1,00,000. Ideally, it is such a balance that your outstanding balance in the a/c should not cross ₹30,000.
3. Credit History Length (15%): The longer, the better. Lenders think that credit history, whatever the form is, is good.
4. Credit Type (10%)Well, if you have all different kinds of credit, even personal loans and credit cards are good. Then that would mean you could handle all those kinds of credits responsibly.
5. New Credit Inquiries (10%): Every time you apply for credit, this is a hard inquiry. Heavy inquiries in a short amount of time will hurt your score; thus, one should not have many inquiries during a brief period.
Why Would You Care About Your Credit Score?
Your credit score is so much more than just a number; it could just become the one number that rules your future in finance:
Loan Approvals: Loan approvals increase the chances that your credit scores are acceptable. OK creditors’ credit scores indicate good creditors, too.
Interest rates: After the loan approval, the interest rates are calculated on the credit scores. When you have a better rating, then your interest rate will be minimal. This implies you have a set of savings left.
Good credits attract superb benefits, fewer fees, and maximum credit permits.
Rent apartments: It is always stated whenever you are looking to rent an apartment. Good credit scores increase your chances of getting accredited to a lovely apartment.
Checking Your Credit Score
You should know your status before applying for any credit. The site is free, and one can obtain one free credit score; this is passed through the bureaus so that every client gets one free report annually. Therefore, monitoring will entail identification even before the expiry date.
Credit Score Check
1. Credit Bureau: Choose one of the credit bureaus that are CIBIL, Equifax, Experian or CRIF High Mark
2. Personal Details: You will input your name, date of birth and PAN number. Probably some sites will ask security questions and may also insist on OTP verification through the site.
3. Credit History and Score: After successful registration, you will be able to obtain a credit history along with a score.
How to Maintain Your Credit Score Good
Be it the creation of a new one from an existing one or the start of a completely new one, you absolutely have nothing to lose as here are some great tips that help you through:
1. Start Early
This is usually when a person is in their twenties or even younger. You could apply for secured credit cards or small personal loans. The sooner, the better since you will build up a long credit history for a better loan.
2. Pay On Time
Pay always on time. You can even write reminders to yourself or may allow auto payment so that you are never behind in time. Apps that assist you with your bill payments exist today!
3. Low Credit Utilization
Credit utilization must be maintained very well below 30% of the available credit. To illustrate, if the card limit is ₹50,000, then the outstanding cannot cross ₹15,000 either.
4. Maintain a Good Credit Mix
Having credit cards, personal loans, auto loans, etc, adds to a good score since it denotes that a person is able to manage and handle several credits.
5. Avoid Hard Inquiries
Avoid opening huge new accounts in a short time frame. That will all fall into one complex inquiry and will immediately drop your score. Try applying for only one. Also, ensure that there are no errors or accounts which do not belong to you on your credit report. If there are any, then write to the agency protesting that account being wrong and ask them to correct it.
6. Credit Counseling
If you are already not able to pay for your debts, even your credits, then you might consider taking up a credit counseling service. They will be able to give you personal advice and suitable strategies relevant to your condition.
Myths of Credit Scores Demystified
This week, I’ll let out some of the best urban legends people tell about credit score lies. Here are just some of the most frequent ones:
1. Myth: Checking your credit hurts it
Reality: There is no such damage or effect of checking the “soft inquiry” own self-score.
2. Myths: Closing Old Credit Accounts Helps Your Credit Rating
Reality: Old accounts closing, especially when they have remained open for a long time. Keep those accounts open to maintain a long credit history.
3. Myth: All Debt is Bad
Reality: All debts are not bad. You score well by clearing your dues on time or on time.
4. Myth: That is when you need to start worrying about the score only at the time of loan application
Reality: Your credit score affects many spheres of life: renting out a house and job applications. You must monitor it from time to time.
Being an intelligent borrower requires knowledge about how your credit score works. That will tell you how to keep it in top shape for even better terms and rates on loans.
You come to know the meaning and importance of credit scores the first time you take an Indian loan and observe that your credit health needs betterment in making good money. That three-digit figure is much more than a number- your credit score gives a tale of all that you do financially and reveals that for you.
Today, you have a good credit score, and with time, the doors open up for different financial possibilities in the future. You will be likely to have financial options because you’ll have proper knowledge of pro-activity.
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