Let Us Understand the Meaning of Credit Score
A credit score is a parameter that depicts your creditworthiness. It is primarily based on different factors like timely payments, financial transactions, cheque honours, etc. It is important for any financial institution to check the credit score of a customer before issuing or lending any type of loan. The credit scores of a person indicates the creditworthiness of the person concerned; it is recorded in terms of scoring patterns.
RBI has also mandated that all the banks should conduct a credit check from any of the credit bureaus before issuing any type of loan to a customer.
It is extremely important to note that improving your credit score is a gradual process. In the case of bad credit scores, it is fairly important to have patience and imbibe righteous financial responsibilities. Here are few of them:
- Keep a check on your credit score: It is advisable to be abreast of your credit score in terms of fetching your reports from credit bureaus like Transunion, Equifax, Experian, etc. This will give you a clear idea of your financial actions – a credit score above 700 points is considered to be a good credit score, and anything below that would need continuous improvement.
- On-time payments: Make your payments on time irrespective of the mode you choose. It is fairly important that any payment instrument gets honored and should be cleared in favor of intended beneficiaries. It is also important that you make your EMI payments on time.
- Use your credit limit diligently – Higher credit limits are always tempting, therefore it is important to use credit as per your payment capacities. There is an important saying “Chew what you can swallow” – be sure to adhere to it.
- Your credit profile should have a right mix of secured and unsecured loans. It’s important that you should not be thoroughly dependent on your credit cards or personal loans; your credit score will reflect really well if there is a right mix of both secured and unsecured loans. For e.g. a mix of home loans, credit cards, auto loan, personal loan, etc. is considered an ideal credit mix. This works best with Pareto effect, wherein your credit should consist of 80% of secured and 20% of unsecured loans.
- Above all, avoid taking credit as much as you can: a higher number of inquiries into your credit report by the respective financial institutions will end up having lots of credit pulls, and this will end up affecting your credit scores negatively. This will further reduce your chances of getting better interest rates for your future loans. So, be careful with your credit score.