Credit has become a popular word in today's world. But for many, the idea behind credit is unclear. One of the key metrics in this area is credit score. Credit score is basically the difference between financial well-being and lack of it.
What Is a Credit Score - How Do You Know If You Have a Good Score? In simple terms, a credit score is a three-digit numerical representation of a person's credit-worthiness, usually ranging between 300 and 900. Banks and financial institutions use your credit score as a metric to assess your creditworthiness and your chances of repaying your loan.
There are many credit bureaus in India and around the world - CIBIL, Experian, Equifax, CRIF High Mark are some of them. Their job is to maintain credit history, compile credit reports, and calculate credit scores. The Reserve Bank of India requires commercial banks to provide credit data to these credit bureaus. The bureaus maintain detailed financial records, including a person's loan accounts, outstanding payments, loan enquiries, EMIs, and how many credit cards they have. It is these factors that determine a person's credit-worthiness and, by extension, their credit score.
Different banks and bureaus have different criteria for considering a good, bad, or average credit score; a score above 700 is generally considered good. It is very easy for people with high credit scores to get loans from commercial banks.
Your credit score can also have a negative impact on your personal finances. People with low credit scores generally have higher interest rates. Higher interest rates can mean a longer repayment period, which can have a negative impact on long-term cash flow. On the other hand, people with higher credit scores may be able to pay off their loans faster and earn more disposable income.
How to get a good credit score? Consistency and timeliness are key. The best way to maintain a good credit score is to pay all your credit payments on time, which includes credit card bills, EMIs, loans, and interest payments. Defaulting or delaying your payments can lower your credit score. It also helps to keep track of your credit limit. Also, since this information is also sent to credit bureaus, making too many loan inquiries at different banks can have a detrimental effect. Having a number of unclosed loans and credit instruments in your portfolio will increase your chances of landing you in a tricky credit situation, even if you make all your payments on time.
The good news is that if your credit score is declining, you can take steps to improve it. Avoid taking on more responsibilities. The best course of action is to reduce the amount of credit you have through the "avalanche" method, which involves settling the liability at the highest interest rate before targeting other liabilities. Once you've paid off your outstanding liabilities, the way forward is very simple: pay your bills on time and avoid taking on more liabilities.
