A credit score is a common term used wherever we go, be it buying a car, applying for a credit card or taking a mortgage. This three-digit number is crucial in every aspect of the financial stability of an individual.
What is a credit score?
A credit score is a number that denotes how creditworthy you are concerning someone who will lend you money. The record of payment of bills regularly earns you a high credit score, whereas if you fail to pay off your bills periodically, you will receive a bad one. Lenders also use this credit score to arrive at the most reliable customers.
Who determines your credit score?
Credit scores are determined largely by credit reporting agencies. These agencies collaborate by exchanging information regarding loans, credit cards, student debt, mortgages, and other owed debt. All of this information comes together, creating an amalgamation that is ultimately used to calculate your credit score. Breaking it down even further, there are three primary things that play a major role in determining your overall credit score. These things include the money you borrowed, the money you currently owe, and the payments you make to the lender, as well as if those payments are on time for the most part.
Credit reporting agencies can easily determine your pending debt and whether or not you are a habitually late payer. Since most lenders look at your credit score to determine if they will issue loans, it is paramount to keep your score healthy. Even if you get the loan, a bad credit score could lead to higher interest rates.
Classification of credit score
Two agencies give a credit score to an individual. They are Crisil and Equifax who use a range between 300 to 850. If you are wondering what a good credit score is and what is a bad one, you need to look at the classification provided below:
Bad Credit: It is a score that lies in the range of 300 to 650. Generally, if your score falls below 650, you will have a hard time procuring a loan or a credit card. If your credit score lies in the bracket of a bad rating, you may have to pay higher interest as well for your loan.
Fair Credit: Fair credit is a score that lies in the range of 651 to 700. It is considered that a score of around 700 helps you reach the 50th percentile, although there may be problems with either getting a loan or credit card.
Good Credit: This is the best score one can achieve. The range lies between 701 to 759. Usually, you can avail of any financial help you want. However, there is no guarantee that the best deals will be provided to you.
Excellent Credit: Usually, a score of 850 is considered to be perfect. Although it is quite challenging to reach the score, generally, a score of 720 is enough to procure an auto loan, and a credit score of 760 will provide with the best mortgage rates.
Why is it advised to maintain a good credit score?
A bad credit score can make life difficult. However, all anxieties can be resolved if you have a good enough credit score. Here are the advantages of having a good credit score:
- Easier to bag a loan: Generally, bad credit scores can cast a shadow over bagging a loan. The problem is quickly resolved if you have a good enough credit score. People take a loan to tide over the financial crisis. The ability to pay off the loans previously procured or regular repayment ability earns you a high credit score that will help you to get your desired loan sanctioned.
- Getting or keeping a job can be easy: Generally, an employer will not check your credit score in-depth but will try to analyze the probable reasons behind the shortcoming of your score. This might cost you the job opportunity. Frequently missed payments can be a significant detrimental factor in employment scenarios. So, it is advised to keep a good credit score as far as possible.
- Premium Insurance at lower rates: If your score lies in the range of 300 to 700, getting a premium insurance cover can be a little confusing. If you have a credit score higher than 700, you can get the best premiums and that too at discounted rates. With a low credit score, getting a premium insurance cover can be severe, and even if an insurance cover is procured, companies may charge higher interest rates.
- Launching an MSME: Personal credit score becomes highly essential in launching a start-up. Director’s ability to pay off debts and additional dues may land them in a problem of borrowing money to kick-off their business.
- Buy a new apartment: Good credit is essential to get a mortgage, but buying a new residence can also be done with a good credit score. If a prospective landlord or owner finds that you are not a regular repayment of the loan, they may charge you higher maybe you won’t be able to pay off your monthly rents.
These are just some points that you should keep in mind regarding the maintenance of a good credit score. Additionally, there are several sites to calculate your credit score. All you need is to maintain a clean record of payment with no dues; your credit score will be higher automatically.