Credit Score: All you need to know about the scale of creditworthiness!

If asked which numbers you think are the most important ones to consider, then we are damn sure that the first thing that will pop into your mind will be the academic marks. Your board results, which you were always told, can shape or ruin your future. Do you remember the day when the theoretical results were first announced? You must be dreaded to the core. All you could think of then was that everything else would get ruined if these scores went haywire. 

 But little did you know then that those would not remain the most crucial score in your life. You might have thought there wouldn't be any other exam, test, or critical evaluation in life any longer. But, there was a lot more coming, and by now, you would have experienced that evaluation and challenges are going nowhere. Life is full of it, and you will get judged on many levels by some scorecard or something else. One such evaluation is the 'Credit Score,' which is much more critical than your academic evaluation. 

 What is a Credit Score? 

A credit score is a three-digit number between 300-900 that depicts a consumer's creditworthiness. Yes, you can say that it is the only score on which your worthiness to access any financial help is based. This three-digit number describes how well you can handle debt and is used by banks to determine how unsafe you are to lend money to. The higher the score, the better a borrower looks to potential lenders, as it depicts the probability that an individual will repay the loan responsibly and timely.  

Why is Credit Score Important? 

Life is filled with dreams and aspirations, but they come at a cost. These costs are usually of two types, money and time. Time depends on our hands, but money is something that we can seldom not manage, even if we try our best. Therefore, there always comes a time when most of us will have to turn to a bank or a financial institute for a loan. Whether buying a new vehicle, a new home or planning an international trip, it all requires significant money. Now you must be wondering where the credit score fits in. Thus, all being said, let us assume that you need to fulfill something that you have been planning for a long time. You must have even saved for it, but suddenly some unexpected expenses come between your financial savings plan. Well, this is when financial support comes into play. Here you can seek the bank's assistance and apply for loans and other economic help. Starting at the top, you must understand a few prerequisites before applying for a loan. Among all those, the first and foremost thing that comes is the credit score. To access the various benefits the bank provides, the first and foremost thing you must maintain is a good credit score.  

What is a Good Credit Score?

According to the credit information company, the closer your score is to 900, the higher your loan application chances are to get approved. Usually, a score of 750 and above is deemed to be a good score. Anything below that can hinder your path to attaining any form of financial help, as even a fair credit score can raise suspicion in the lender's eyes. 

Within the range of 0-900, there are four levels you can achieve:

• Bad (300-629)

• Fair (630-689)

• Good (690-749)

• Excellent (750-900) 

What are the advantages of a Good Credit Score? 

A good credit score can significantly impact your entire financial life, influencing the type of loans and products you'll be approved for. A good credit score almost always qualifies for the best interest rates you can get approved for loans and credit cards within no time. Here are some of the benefits you can enjoy for a good credit score; these include: 

• Best rates on car and homeowners insurance. 

• Easier to apply for and secure a loan. 

• Easy and favorable loan terms.

• Access to a variety of credit cards.

• Garner has a good reputation among lenders.  

How is the Credit Score calculated? 

The credit bureaus calculate this three-digit number in the country. Generally, banks and non-banking finance companies (NBFCs) display an ideal score of 750 and above. But, each organization has its algorithm to compute credit scores. There are various factors on which the score is calculated. A few generic consideration factors involve: 

• Payment History - High Impact

• Credit Utilization Ratio - High Impact

• Age of the Credit - Medium Impact

• Total Accounts - Low Impact

Let's delve into these factors in-depth and analyze their impact on your credit score calculation. 

Payment History: Payment history is perhaps the main factor influencing your score. If you have been good at taking care of your bills/advance EMIs, it recommends that you are a mindful borrower and are at a lower risk of being considered as the default. Attentive credit conduct will qualify you for particular rates on advances and faster application endorsement. Making late installments, missed installments, and so forth will bring down your score by a few.

Credit Utilization Ratio: Credit utilization is the second greatest factor influencing your credit assessment. A credit utilization ratio alludes to the aggregate sum of credit you have utilized about the total absolute credit limit accessible to you. The ratio is determined by dividing your overall notable balance by your total credit limit. According to experts, consumers should ideally use only 30-40% of the credit limit to keep a high score.

Age of the Credit: To assess your creditworthiness, your entire credit history has to be considered. If you have responsibly handled your credit in the past and continue to service payments on time on your active credit lines, it will positively impact your credit score. In addition, a long credit history helps lenders make sound and active decisions on whether to offer you credit. Hence, keeping credit cards with a long history open is recommended compared to cards you have recently acquired.

Total Accounts: It is important to maintain a mixed credit, hence a good amalgam of secured and unsecured credit. A credit card is an example of unsecured credit, while any form of loan, be it a home or car loan is an example of secured credit. A mixed credit helps to boost your score. Although it has a lower impact than other factors, one must not ignore it. Your total accounts reflect your experience with managing both types of credit. You should avoid borrowing only one kind of credit in high quantities as it could hamper your score.

Credit Enquiries: Credit inquiries refers to the list of occasions where third parties have accessed your credit score. When a lender reviews your credit score, it is counted as an inquiry. Remember that multiple loan inquiries on your credit mean that you may have made many loan applications in the past, and thus will make you seem desperate in the eyes of the lender and will eventually affect your credit score. 

These are the generic things on which your credit score is evaluated. Maintaining these factors will help you get a good credit score and further easy and better financial aid. Check your credit score for free periodically to see where you stand on the assessment parameters. If you fall short of 750, you need to work on your score. For more tips to enhance your overall credit score, read this inciting read and reap the benefits.