Credit Score and Interest Rates: How your score influences borrowing costs

At the heart of your financial narrative lies the three-digit numeric that determines whether your borrowing journey will be smooth sailing or filled with hurdles. This number is your credit score. A high score can guide you toward shores of low interest rates, while a poor score can leave you stranded in the sea of high costs. Let’s take a closer look at the dynamic between your credit score and interest rates, and how a high credit score can save you from high borrowing costs.

Your credit score

Your credit score ranges from 300 to 900 and is the number lenders refer to when considering your credit application. A higher score of 750 or more is generally considered ideal, indicating to lenders that you’re a trustworthy borrower. Your score is made up of different aspects connected to your financial habits: how often you pay your bills on time, how much of your available credit you actually use, how long you’ve been using credit, etc.

Credit score and borrowing costs: The connection

When you borrow money – say, for a home or a car, a vacation, or to fund your higher education – lenders want to know if you’ll pay them back on time. To do this, they consult your credit score. If you have a high credit score, lenders understand that you have a history of paying your dues on time and being generally responsible with money. So, they’re more likely to give you a lower interest rate and other favourable terms. But, if your score isn’t up to the mark, lenders might see you as a risky borrower, and that can mean rejection or higher interest rates and unfavourable terms if you do get approved.

Your credit score is also a deciding factor in your eligibility for different types of loans and the maximum amount you can be approved for. These considerably impact your borrowing costs as well. With a poor credit score, you might find yourself:

● Ineligible for certain types of credit

● Liable to having your credit application rejected

● Saddled with high interest rates to offset the risk to lenders

● Approved for a smaller amount than what you’d applied for, limiting your spending power

● Offered a shorter loan tenure, which translates to higher monthly payments that could prove burdensome

● Forced offer collateral, which can be problematic if you don’t have the necessary assets

● Required to present a co-signer or a guarantor

As you can imagine, many of these situations can prove further detrimental to your credit score. Therefore, it’s always advisable to check your credit score and work to improve it, if necessary, before applying for credit. Not only will this increase your chances of approval, but also help you snag more favourable terms.

Tips to boost your credit score and save money

If your score is a little lacklustre, there’s no reason to be disheartened. Since your credit score is calculated based on your financial behaviours, it is more than possible to improve your credit score by implementing healthier financial habits. Here’s how:

● Pay your dues in full and on time every time

● Don’t use all your available credit, instead attempt to maintain a credit utilisation ratio of 30% or less

● Maintain old credit accounts in good standing to preserve a longer credit age

● Acquire a healthy mix of credit

● Limit your credit applications to minimise the damage caused by hard enquiries

● Regularly monitor your credit report and score to catch and rectify any inaccuracies that might be hurting them

Your journey to improve your credit score need not be made alone! Trust Bajaj Finserv Credit Pass to be your loyal companion. With its personalised dashboard, it can provide you with real-time insight into your credit health report and the factors that impact it, such as upcoming payment deadlines, your credit utilisation, and your credit enquiries, among others. With monthly CIBIL Score checks, you can track your progress and identify areas for improvement and use the nifty Credit Score Simulator and EMI Calculator to make informed credit decisions. By leveraging the power of Credit Pass, you can boost your credit score and your chances for loan approval at better terms. Sign up today and be better prepared!