To be able to understand why you need a good credit score to represent you, it can be useful to be aware of the basics first. Once you grasp how credit works, you can not only avail all of the benefits, offers and rewards that come with different credit card transactions but also improve your credit score drastically.
What is Credit?
In economics, a debit is a decrease in one’s assets and a credit is an increase in the same. When you get a bank account, a credit would mean an increase in your bank balance while a debit would mean a decrease in your balance.
Debits cause the flowing out of money from one’s expense account due to the costs incurred by the consumption of goods and services. A credit is the opposite. However, a credit can become a liability in the case of an unpaid credit bill which is a debt that you must clear within a stipulated amount of time.
What is an Ideal Credit Score?
A credit score is a three-digit number that indicates how credit-worthy you have proved yourself to be with your past transactions. This is done by analysing your credit files which show how successful or unsuccessful you have been in clearing your credit bills on time. Thus, it indicates to your potential lenders how capable you are in handling the risk factor involved in borrowing money.
In India, credit scores can range from 300 to 900. Credit bureaus like CIBIL (Credit Information Bureau India Limited) are in charge of evaluating your credit score. You might have a score of about 700 and wonder what it means. Any credit score in the range of 700-750 is usually considered a decent one. Likewise, anything above 800 is considered an excellent score. However, credit scores like 650 or less might not be considered strong enough for lenders to approve high-interest loans to you.
How to Build a Good Credit Score?
To build your credit score from scratch, you can start by applying for a secured credit card scheme. You can also choose the shortcut of building credit faster by becoming an authorised user of someone’s else preexisting account. It is easy to attain an ideal credit score by a few months of consistent credit activity. Once you have indulged in an amount of credit activity that is enough to generate a score, you can then focus on making it better.
The rules are simple – do not borrow more than you can pay back and make it a point to pay all your credit bills on time. Your credit score will get adversely affected if you miss a payment or default on a loan. Also, make sure to settle any pre-existing debts so that it does not prevent you from attaining the desired score.
Another factor that improves your credit score effectively is the diversity of your credit. A credit mix shows that you are equally capable of responsibly handling different kinds of credits, be it mortgages, personal loans or credit card bills.
What are the Benefits of Maintaining a Good Credit Score?
The benefits of maintaining a favourable credit score are manifold. First and foremost, it creates a favourable impression upon prospective lenders. Building a good score and maintaining it helps you to easily avail future credits and loans. The higher the credit score, the more qualified you are to avail of low-interest loans.
The amount of money you get to borrow, known as the credit limit, also increases with a high credit score since money lenders or banks are thereby satisfied with your capability of paying back the money on time. Sometimes it even allows you to negotiate with lenders on interest rates. With an impressive credit file, you get to reap better rewards and benefits on credit products.
Even for your own financial health, building credit works as a favourable sign. Other than coming in handy while making big investments like getting a car or buying a house, it also implies your adeptness at managing your finances. In fact, car buyers with high credit scores often get better insurance rates than the ones with unsatisfactory scores.
The thumb rule for building the ideal credit score is to borrow only as much as you can repay and to pay your bills timely. It is equally important to maintain that standard once you get to the top and secure it from any kind of deterioration. Knowing the correct ways of achieving these can make you more confident in choosing the right financial goals for yourself. Moreover, the added benefits of having an impressive credit score can work as the right kind of motivation for improving it.