Money is a hallmark for any kind of transaction in this world and a credit score is like trust. The higher the credit score, the higher the lender’s trust, and vice-versa.
Credit score is a measure of the repaying capacity of the borrower. Some of the benefits of having a good credit score involve getting swift bank loan approvals, credit card offers, flexibility in the loan repayment period, etc.
Nowadays, owing to stricter rules, lenders look into the repayment history of the borrower, credit score report, last 6 months’ salary statement, etc. before issuing loans. So, every individual should keep a tab of his/her payments and repayments, as well as the credit score for the future.
Conversely speaking, some might be oblivious to the significance of credit scores and how they work in the real world. Knowing about credit scores aids you in managing your finances properly. So let’s dive into the concept in detail to understand more about credit scores and what they mean.
Firstly, what’s a Credit Score?
A credit score is a three-digit number stating the borrower’s creditworthiness. The credit score ranges from 300 to 900 points. This score is given by the bureaus like CIBIL, Equifax, Experian, etc.
The credit score report encompasses all the information related to the borrower like loans, active and inactive credit card accounts, any bankruptcies, etc. This data is used by the bureaus to develop a detailed credit report of the respective individual. A credit score of 750 and beyond is recognized to be a sound score. This inculcates faith in the borrower that he or she will be able to pay the credit or loan back timely without any default.
This must be sufficient to get the bigger picture of what’s a credit score. Now, let’s look at the Factors Taken Into Consideration for a Credit Score
First one is Payment History:
It’s key information for every banker or lending authority. Timely credit card bill payments and loan EMIs enhance your credit score and save you from paying late fees.
If you fail to make your loan/credit card payment on time, your credit score takes a plunge. This one category accounts for 35% of the whole score.
Next factor is the Debt Amount:
The second most crucial factor that’s taken into consideration is debt amount, i.e. how much loan have you taken. It accounts for 30% of the total score, containing information like how much of the credit limit of a potential borrower is already used and how much is still available. Your credit card limit is also a part of the overall debt amount.
After that you have Credit History:
Generally, lenders may not agree to your papers and the information you share just after the first glimpse. Lenders want to know that you have a sound credit history and that you have processed your payments. Out of the total credit score, 15% accounts for this section.
Fourthly you have Other Credits, if any:
Diversity in your credits proves that you can afford to pay them. In other words, if a borrower has other debts like mortgages, loans for education and housing, and others, it elevates the credit score. Around 10% of the total credit score accounts for other types of credits.
Finally, Recent Credits Taken:
Applying for a new loan requires the ability to pay back but some borrowers keep applying for loans even without repaying their earlier, pending loans. This means that some borrowers go the extra mile to get more loans to finance their previous debts, thereby piling up their existing debts.
The recent credits account for 10% of the overall credit score. Since it’s one-tenth of the whole score, lenders wouldn’t take it as a prime point to sanction a loan. However, these small things will later turn into a huge burden if you don’t keep an eye on your finances and monthly budgets.
On Freecharge app, you can check your credit score for free. You can also avail easy borrowing options like pay later, credit cards and personal loans. So don’t forget to check it out.