Why are credit scores important? Here’s how to improve it

Everyone must have heard the words such as "loans," "credit," and "debt" as we become an adult. The majority of us, though, don't fully understand the pros and cons of those words or how they function. When it comes to personal finance, ignorance may be bliss in some situations, but it is a mistake that will haunt you every time you make the first step toward taking a loan, no matter how big or small that is. It is safe to understand and maintain your credit score before such circumstances arise rather than waiting to learn about terminology and scores when you apply for credit.

Therefore, having a high credit score makes it easier for you to get credit cards and personal loans of all kinds. But what exactly does the term "credit score" mean? Let us understand.

In India, there are four credit reporting agencies or credit bureaus whose credit scores are well-liked by both borrowers and lenders. These include CRIF High Mark, Experian, TransUnion CIBIL, and Equifax.

The range of a borrower's credit score is 300 to 900. Your credit score indicates to a bank or lender whether you are a creditworthy borrower.

Scores of 750 or higher are considered to be good. Your credit history, which includes the number of times you've borrowed money, the amount you borrowed, the types of loans you've gotten, and other pertinent information, is what determines your credit score.

Another crucial element is timely payment of credit card bills and loan EMIs.

Your bank sends information about each financial transaction, credit inquiry, new account opening, etc. to CIBIL, which keeps track of it and compiles it into your CIBIL report. If you choose to apply for a loan, the lender will request a copy of your credit report. This will give them information about your credit score and the terms they can offer you.

For convenience, it is possible to formalise the 300-900 range into five brackets: 300-600 (needs attention), 600-649 (doubtful), 650-699 (satisfactory), 700-749 (good), and 750-900. (excellent).

Here’s why a good credit score is important and how you can improve it:

It is very important to comprehend how you can raise your credit score. At its most basic, this simply means being fiscally responsible. Pay all of your EMIs and credit card bills on time and don't break any agreements.

Early stage

Perhaps the simplest yet important point, especially for those just entering the financial system, is to establish a track record of credit and responsible repayment as soon as possible. Naturally, 20 year olds will not be interested in applying for a huge loan, but they can build a solid credit history by using small credit lines for necessary purchases. By doing so on a regular basis, they will be in a much better position to go to the bank for a home loan or a car loan because of their excellent credit scores.

Do not block credit cards if you have more than one

If you have more than one credit card and only want to use one of them, it is best not to deactivate the other cards. Breaking credit lines with a bank lowers your credit score. The preferred option is to keep such credit cards, remove the recurring payments, and check on them every few months to ensure that no payments are being made through them. This demonstrates that you have consistently held multiple lines of credit over a long period of time.

Keep a check on credit use

As previously stated, the credit use to credit availability ratio is an important metric in calculating your credit score. Aside from using as little of your credit limit as possible, you can contact your bank and have your monthly credit extended. As long as your expenditure does not increase, the same amount of expenditure will be compared to a higher potential limit.

Also Read: Eligible for a pre-approved loan offer? Check rules here