What is credit score ?

 “If you don’t take good care of your credit score, then your credit won’t take good care of you.”

― Tyler Gregory

Introduction

Credit Score is a number of three digits that commands your financial life. It is manifold times more important than your Class XII result for which you were chided for years. The three-digit summary of your financial history can make or mar your pecuniary journey.

Further Reading: Best Five Small Cap Funds

Why do you need a Credit Score? Especially a good one!

A credit score is an advisement of one’s financial history. If you want to buy a car, apply for a rewards credit card, or take out a mortgage/loan, you need good credit.

But why? Because it’s not just any number. It represents your creditworthiness to the lender. Lenders have this maxim, “The best way to check creditworthiness is to check the Credit Score”.

A good score doesn’t just assure you the loan you solicit, but also the best deal with perks like minimum interest rates, longer repayment period, etc. A low credit score indicates the “probability of default” of a borrower based on their credit history.

Scrutinizing a ‘Good’ Credit Score

Credit scores range from 300 to 900. Now, it is very subjective to say what range is a good credit score range. However, a score of 750 or above is generally considered good.  It is important to know that nearly 90% of the loans granted to individuals with a score greater than 750. A score of above 800 is appraised as exceptional.

How’s the ‘Score’? High Sir!

A high credit score is a reflection of sound financial decision making in the past. In layman terms, it is a representation of your disciplined past financial behavior. It boosts up the creditors’ confidence in you. It backs the belief that you will repay your future debts as agreed.

Every month, the credit bureaus collect monthly reports (credit information report) from banks/financial institutions detailing individual loans and payment details.

Also Read: Compound interest : Why compounding is considered as the eighth wonder of the world

Credit Report versus Credit Score

A credit report includes all information of the borrowers like personal information, loan accounts details, credit card details etc whereas credit score is a three digit number that indicates borrower’s creditworthiness.

What affects your Credit Score?

As mentioned above, the three-digit number is a reflection of your financial summary. It is based on the information in your credit report. Your credit report discusses how you have exploited credit in your lifetime, including the amounts you currently owe, and how long you’ve had each account. Finance Expert Amy Fontinelle writes, “If your loan EMI/credit card balances go unpaid, your credit score will start to diminish.

In developed countries, your renewal insurance premiums, mobile connections, loan EMI’s amounts depend upon your credit score. The delayed payments reflect your tendency to be irresponsible in general.  All these factors create an impression that you are most likely to file an insurance claim and are a higher risk client. And it is not just insurance companies, many times new employers also check on the credit score of potential applicants for jobs, and such concerned employers who probably do not hire employees with a poor status of this score.

If purchasing or refinancing a home is in your future, your this score is particularly important, as it will determine the interest rate on your mortgage, or whether you’re even eligible for a mortgage at all.” In India also, these days the companies are checking this score of the applicant before hiring them.

Now, let us discuss each of the factors that plausibly affect your Credit score:

Payment or Credit History

Payment History is one of the major determinants of your Credit Score. Any delayed payment or missed instalment in the recent past will pull down your credit score. Around 50% of the loans granted to the individuals

Further Reading: Experian

Amount of Debt You Owe

Made all your payments on time? If you have a lot of debt, then your score might be at risk. If an individual uses its debt potential to the full, it loses the flexibility to issue further debt. To maintain flexibility, one must maintain some borrowing power to take care of future needs. Chinese philosopher Confucius has rightly said that “When prosperity comes, do not use all of it.”It is always advisable to save early through monthly (SIP) in mutual funds. Invest your money with Budwisefunds to take care of your future needs and to be precise rely less on loans.

 Length of Credit History

Make your credit score age like a fine wine. A person with a longer credit history would have a better credit score, subject to the fact that it’s not marred by late payments and other pessimistic items. Therefore, it is wise to carry a credit card even if one does not use it much often. However, if you don’t have a long history; there’s nothing to be worried. As long as you do not owe a lot of debts and payments have been made in time, even a short credit history can be fine too.

Credit Mix

It is always advisable to use a mix of secured and unsecured loans. A person with too much-unsecured loans may be viewed negatively.

New Credit

Individuals should not try to apply for a new credit frequently. A person with continuous excessive credit needs may be viewed negatively. 

Also Read: Diversification or Diworsefication: Look for Diversification and not Diworsefication

Monitoring

At last, you should check your credit score on a continuous basis throughout the year. You should report any errors/misreporting in the form of rejected applications. You can check your credit score through Budwisefunds free of cost.

Types of Loans

Secured Loans

It is a type of loan wherein the loan is secured by the assets of the borrower. An asset may be a common asset or a particular asset for which loan is borrowed. For example – home loan, loan against property, car loan, education loan, etc.

Unsecured Loans

These types of loans are not secured/backed by the assets of the borrower. The best example of an unsecured loan is a personal loan. Since it is not backed by the assets of the borrower, that’s why personal loans carry a high rate of interest.

Budwisefunds is an online mutual fund investment company that can help you manage your investments and finances so that you can maintain a good credit score. Impeccable and transparent services help to ensure that your money is sown in the right funds and brings effective returns.

Further Reading: hdfc bank

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