Credit a great way for the modern financial system to work and with the evolution of financial system, it is becoming more and more important for lenders to take sound financial decision. The concept of credit score has therefore been developed. Credit score has made it possible for lenders to make credit more accessible to the largest number of people. Today with the development of loan app and internet based lending, credit score has become key to building a truly inclusive financial system.
What is the credit score?
Your credit score is the three digit score that is given to every person who takes a personal loan or credit card or any other kind of debt. Everyone starts with a standard score and gradually it will go up or down with the passage of time. So, as you take a loan and keep on paying your loan installments, your credit score keeps on going up. As you increase your earnings, your credit eligibility will also keep on going up, which also increases our credit score. Then there are cases where your credit score also goes down. If you miss an EMI of your loan, it will impact your credit score. If you have to settle a loan which you have not paid for some time, your credit score goes down. If there are too many hard checks on your credit score for loans, your credit score goes down. If you take too much credit and your credit utilisation runs too high, your credit score will go down.
Credit score is graded in different categories where it may be considered good, bad, or average. While there is no fixed categorisation of where does the credit score fall as the same depends on lender to lender so when a credit score can be considered good by one loan app or lender, the same may only be considered as average by another lender. The broad range is that credit score over 800 is considered by almost everyone. Similarly, credit score below 700 is also considered bad by most of the lenders. Whereas anything in between the two is considered average by most lenders.
Importance of credit score:
It is very important for everyone to keep a track of their credit score at all times. There are number of reasons behind this:
- It is the indicator of your commitment to repayment of the debt! The biggest movements in the credit score, both upwards and downwards are based upon how disciplined in the repayment of your EMIs you are. A loan app will use your credit score movement to judge how disciplined you have been in paying back your loan. For people who have too many missed EMIs, the credit score will be loan and lender will be hesitant to give them credit of any kind.
- It is the indicator of your financial health. You credit score is built on how much loan you are eligible to get and how much of this eligibility have you actually utilised. If you have a very low credit utilisation, the lenders will consider you to be a careful borrower and thus will be able to give you a personal loan. On the other hand, people who have a very high credit utilisation ratio, will not be considered as responsible with the debt.
- It is the credit score based upon which the lenders make the decision to give you loan as per what interest rates and how much loan processing fee will be charged to you. People who have high credit score are known to be responsible with their repayments and are thus considered to be low risk cases to whom lenders can give out loan with confidence. Thus, lenders will not charge them high interest rates or processing fees. On the other hand, the people who do not have a high credit score can be considered a high risk borrower and thus lenders will try to spread their risk and charge high interest rates and higher processing fees on them.
- The credit score also allows the lenders to decide how much loan can they give to a certain person. Two people who are earning the same and bring the same level of documentation, the eligibility of loan for the two people will differ on the basis of credit score of the two people. Someone with a higher credit score, despite all other things being equal, will be eligible to get higher credit eligibility as opposed to someone with a lower credit score.
Checking your credit score:
You as a borrower should be very careful about keeping an eye on your credit score. All credit score trackers allow you check your credit score for free at least once in a year. More detailed credit reports can be checked by everyone upon payment of a very low fee. Sometimes your credit score will be impacted because of factors which might not be related to you. May be your credit profile has debt which does not belong to you. If such a situation occurs to you, it can drag your credit score down because of things for which you are not responsible. If you find any such problem with your credit profile, you must get the same rectified on an urgent basis as it will have a lot of impact on your ability to borrow.