June 21, 2024

Decoding credit scores: Understanding the key to financial empowerment

3 min read
personal financial planning.

Just like during university days, you would get into a college depending on your entrance exam score or your boards percentage, to get any form of credit from a financial institution, you need to present your credit score. Credit scores play a crucial role in helping lenders determine your creditworthiness and financial stability. In this article, let’s decode credit scores and understand their importance in financial planning.

What are credit scores?

 It is calculated based on your credit history, repayment track record, and other financial factors. . Credit scores are provided by credit bureaus such as CIBIL, Experian, and Equifax.

The higher your credit score, the better your chances of getting approved for loans and other forms of credit like credit cards. Credit scores are calculated by credit bureaus based on your credit report, which contains information about your credit accounts, payment history, and other financial details.

Importance of credit scores

Credit scores play a crucial role in personal financial planning. A good credit score can help you secure a loan or credit card with favourable terms and interest rates. For instance, if you have a credit score of 750 and above, your loan eligibility enhances significantly, and you are also in a position to negotiate a lower interest rate with the lender. Borrowers with high credit scores are low-risk borrowers so lenders can consider giving credit to them at attractive rates.

On the other hand, a poor credit score can not only lead to highinterest rates, increasing your cost of borrowing but can also lead to rejection of loan applications.

What impacts credit scores?

Credit scores are impacted by several factors, including:

  • Payment history: On-time payments and a consistent track record of paying off debts can positively impact your credit score. Hence, it’s essential to not miss your Equated Monthly Instalment (EMI) payments.
  • Credit utilisation: The amount of credit you use compared to the total credit you have available can affect your credit score. Keeping your credit utilisation ratio low can positively impact your score. Experts recommend not utilising more than 30% of the credit available to you.
  •  Hence, it’s recommended to not cancel your first credit card, even if you end up getting others later.
  • Credit mix: Having a diverse mix of credit types, such as a credit card and a personal loan, can positively impact your credit score.
  • Credit inquiries: Multiple credit inquiries in a short period of time can negatively impact your credit score since it shows lenders that you are credit hungry. It is important to limit credit inquiries and only apply for credit when necessary.

Understanding these factors and how they impact your credit score can help you take steps to improve your creditworthiness and achieve financial empowerment.

To conclude

Understanding credit scores can help you manage your personal wealth management effectively and secure credit at attractive terms whenever needed. By following the tips mentioned above, you can build and maintain a good credit score and achieve financial empowerment. Remember, a good credit score is not just a number, but a reflection of your financial discipline and responsibility.

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