In these times when each of us is increasingly dependent on credit cards whether to buy household appliances or furniture or simply to splurge on some luxuries it becomes very necessary to know what a credit score is.
Just like you use a thermometer to check body temperature when ill or a speedometer used to calculate the distance travelled over time, a credit score is used to analyze your credit health. One of the important aspects of being financially healthy is checking what your credit health report says. A credit score is a 3 digit number ranging between 300 –900 representing your credit and payment history.
And, yes why exactly is it important for you to know about your credit score is because it plays a significant role when you are looking to buy a car on credit or get a home loan or even apply for a new credit card. It shows how well you have maintained your credit payment in the past and thereby gives a picture of your management of credit in the future.
A low credit score translates into having to pay higher interest rates on loans or at times being denied to avail a loan or even a new credit card. Building and maintaining a good credit score is an important skill that will benefit you when you need to avail loans. A score above 700 usually suggests good credit management.
A credit score tells the lenders what level of risk they would be taking by loaning money to you and that is why when you apply for a credit card or any loan your credit score is checked.
Factors Determining Credit Score
Payment History: This is the record you’ve established of how promptly or not promptly you have been paying back your credit. This negatively impacts your credit score in terms of late payments, defaults on your EMIs.
Credit Usage: It is the ratio of your credit card debt to your credit limits. It checks as to how much of your available credit you use on a monthly basis. If an individual often uses their entire credit limit then they are higher chances that he/she finds it difficult to repay back.
Duration of that Account: With a longer credit history more information is available about your spending habits. This includes the average time since the accounts were opened by account type and the account activity.
New Card Inquiries: Every time you make an inquiry about getting a new credit card, your credit score is affected. Minimize the frequency of applying for unnecessary credit by often requesting for new credit cards.
Credit Mix: This refers to a mix of revolving credit like credit card and installment loans like auto loan or home loan. A history of borrowing using different types of credit (for example, credit card, home mortgage, and car loan) increases your score.
In India credit scores are calculated by credit information companies such as CIBIL, Equifax and Experian. You can get a copy of your credit report from these agencies by paying a nominal charge.