How good is your credit score?

Loan application not approved? Did your application for a new credit card get rejected again? The answer is in your Credit Score. That magic figure that every lender checks before issuing a new loan or credit card.

What exactly is a credit score? What are the factors that affect your Credit Score? How to improve your Credit Score? Does a payment default on your personal loan affect your Credit Score? Does old credit card default affect your Credit Score? And more importantly, how does a Credit Score make any difference?

All your questions answered, one by one, below.

What is Credit Score?

Credit Score is a figure that measures the creditworthiness of the loan applicant, based on multiple factors like his/ her past loan/ credit card repayment history and social score. The payment history of a borrower gives an indication of whether the borrower can repay loans on time. A person’s social score also takes into account his/ her activity on social media channels and is now emerging as a way to evaluate a person’s credit worthiness. Your credit score considers all financial transactions wherein you have borrowed and repaid money and determines whether you should be issued a new loan or credit card.

Any payment default, any missed EMI, any old unpaid credit card dues affect your credit score negatively. Financial lending institutions and banks keep track of a borrower’s payment history across loans and credit cards, no matter which bank the card or loan was issued from. Your Credit Score shows whether you have borrowed and returned money responsibly in the past. It gives the lender a fair idea of whether you are likely to repay the loan on time or not.

Most customers have a Credit Score that ranges between 300 to 900. A good Credit Score of 750+ is considered healthy and is more likely to get loan approval easily. A poor Credit Score of below 600 is considered risky and it is difficult to get a loan or credit card sanction with such a rating. Even if such a loan gets sanctioned, it is often at a higher rate of interest.

What factors affect your Credit Score?

1. Payment History: Delayed payment of your current loan EMI or credit card affects your credit score. Even one missed EMI impacts your credit rating negatively.
2. Payment Default: Old unpaid loans and credit card dues that you had taken in the past, but failed to repay affects your Credit Score. Payment default on old personal loans and credit card dues have a negative impact on your Credit Score.
3. Loan Balance: Any loan balance outstanding against your name figures in your credit history. This could be an auto loan or a home loan or a farming loan or a personal/ retail loan.
4. New Credit: Applying for a loan repeatedly works negatively against your credit rating. Too many accounts or enquiries indicate higher risk, making it difficult to get a new loan or card.
5. Credit Utilization: A low usage of available credit shows low dependency on credit and this is good for your Credit Score.

How does a Bad Credit Score make a difference?

1. Poor Loan Approval: With a poor credit rating, you will find that your loan applications get rejected often. Lower the score, lower the chances of getting a new loan or card approved.
2. Higher Perceived Risks: Old loans not cleared; delayed EMI payments are a red flag to lenders. Even if your loan gets approved, you will probably pay higher interest than someone with a better Credit Score.
3. Restricted life choices: Old unpaid loans and credit cards impact your life choices. A poor Credit Score is an obstacle to your freedom to take on new projects like taking a housing loan for a new house or an education loan for securing your child’s future.

How to maintain a Good Credit Score?

1. Good Credit History: Know what factors impact your Credit Score. Credit cards, any kind of loan, payment history, missed payments, all these affect your Credit Score.
2. Timely Debt Repayment: Pay your debts/ EMI/ credit card dues on time. Set payment reminders and limit card usage.
3. Longer loan tenure: Keep installment amount small and manageable. Opt for a longer loan tenure with smaller installments to manage payments on time.
4. No defaulting on loan accounts: Negative information on your account like Foreclosure, Writeoff, Settlement have a negative impact on your Credit Score..
   
5. Limit new Credit requests: Manage your debts well. Too many debts in your history reduce credit points. The lower the debt, the easier it is to maintain a healthy Credit Score.
   

Why maintain a Good Credit Score?

1. Negotiate better interest rates: A healthy Credit Score gives you the power to negotiate a lower interest rate on your credit card or a new loan.
   
2. Loan Sanction: A good Credit Score gives you the freedom to opt for any kind of loan like Auto loan, Home Loan, Retail Loan, Personal Loan etc. Banks are more likely to sanction a loan to a borrower with a healthy Credit Score.
3. Get a better deal: A good Credit Score will enable you to apply for the best credit cards with low interest rates, rewards and cashback offers.
   
4. Pay lower premium: Insurance companies check the past payment history of their customers and are likely to levy higher insurance premium on someone with a poor Credit Score.