Why building a personal credit score is important and the factors affecting it?
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September 20, 2018
Credit ratings have only just started to pick up steam in India and yet they have already become a very important part of the financial ecosystem. In the same breath, there are thousands of Indians who still aren’t aware of their credit score and thousands more who do not even have a score. Based on this scenario, we felt it necessary to tell you why a credit score is important along with the factors that influence your score. Hopefully, we will encourage and help you build a healthy credit rating in the process.
So why are credit scores important?
They influence your eligibility: Individuals with healthy credit scores are more likely to be accepted for credit than those with a lower credit rating.
They influence your interest rate: Individuals with a poor rating present a higher level of risk to lenders. That said, very few lenders will provide loans to such individuals, the ones that do will levy higher rates.
So no loan, means no problem, right?
Wrong! You might not require a credit score as long as you don’t apply for credit yourself. But down the road, the lack of a credit score or a low score might hurt someone else’s loan application.
Take for example Mr. John – he’s worked hard to ensure he never needed to apply for credit. He tried a credit card once and defaulted on his first bill because he forgot the due date, after that he canceled the service and kept a distance from credit. Many years later, his son Dan wanted to pursue his MBA in the US.
Dan knew it was going to cost a lot, but at the same time, he didn’t want to burden his parents for this money. So he decided to pursue his dreams independently by applying for an education loan. His parents were very proud of his decision and Dan had an immense sense of accomplishment.
Unfortunately, all Dan’s planning came crashing down when his application was rejected as his father’s credit score was not at par with what was required of a guarantor.
This is just one scenario, there might be numerous other occasions when you’ll need to sign as someone’s guarantor or apply for credit on a loved one’s behalf. And if you have a poor score, all your plans could be hindered. This only stresses the importance of credit scores and the need to have & maintain one. In this regard, knowing the factors that influence your score can help you improve it.
So what are the factors that influence my credit score?
The length of credit history: Around 15% of your credit score depends on how long you’ve been using credit. A longer history means you have more experience in handling debt and will improve your score.
The amount owed till date: This will account for 30% of your credit score. The more you’ve borrowed, the better.
Repayment history: This is one of the more important factors when it comes to credit scores and accounts for up to 35% of your score. Successful repayments will boost your score considerably and a late payment will bring it down just as much.
Types of credit: This accounts for 10% of your credit. The more types of credit you’ve applied for, (education loans, credit cards, a line of credit, etc.) the better.
So there you have it, why credit scores are important today and why they promise to be all the more important in the future along with the factors that influence your score. Hope this has been helpful, good luck and all the best!