Why Does Your Credit Score Matters?


In today’s world, where every middle-class family wishes to have a house and car of their own, financing it entirely on their income is quite a tough task. It is very likely for a middle-class person to look for home loans and car loans in such situations.

Seeking for a loan, however, is not an easy task. With so much of a bank’s loan remaining unpaid, the banks have stringent their conditions for providing loans, and that’s where your credit score comes into play.

To begin with, let us first see what credit score exactly means. A credit score is a three-digit number that evaluates the creditworthiness of a customer based on his credit history, which determines the probability of repayment of a loan.

Such data are widely used by insurance companies, banks, and other financial institutions before lending money to someone.

A credit score can range anywhere from 300 to 850. A free credit score is the best sorted from ever. A Credit score from somewhere around 600 -850 is considered very healthy and can easily fetch a loan.

The higher the credit score, the better it is for a customer to get a loan from any financial institution.

Factors that determine your credit score

Why Does Your Credit Score Matters

A lot of factors affect the calculation of credit score, and therefore one must keep in mind some key factors that determine your credit score and must always work upon it to improve the odds of having a better credit score. 

1# Payment History: A simple record of whether you pay your bills on time or not. Utilization Ratio: It keeps a record of how much money one is using out of the total credit available. A person who is close to maxing out their credit limit is unlikely to repay the loan and vice-versa. 

2# Length Of History: It is the average age of the account, as well as the duration it has been used lately.

Various uses of credit score

getting out of bad credit

The credit score is widely used in the corporate sector these days, especially by banks and financial institutions, to determine the probability of repayment of the loan on time. 

1# Insurance companies: They analyses the credit score to determine the likeliness to file a claim and the amount that one claims. This data helps the insurance companies to decide whether to give insurance and how much charge must be imposed.

2# Utility companies: A credit score is widely used by utility companies in decision making of whether a new customer has to make an original deposit. Besides, the credit score is a key player when a cell phone company or a landlord considers a new tenant.

Credit is a lifetime Comfort

Credit is something that is defined by how you pay. The entire history is captured and calculated. The different people in our lives, including the business, landlords, mortgage lenders, utility providers, and also employers, track your credit to proceed with further financial transactions. 

To assure a pre-approved loan, be it for your new car or a new house, it is a mandate to have a better credit score. 

Working of credit score

It is essential to know the working of credit score to ensure that one maintains a good credit score for easy loan approvals.

The lenders here we are most likely considering the financial institutions which provide various loans. They, first of all, draw out the information of the person who applied for a loan such as credit reports, bill payment history, utilization ratio, and period for which one has held an account, to name a few.

However, various other factors come into play when it comes to applying for a mortgage. In case of applying for a mortgage, the system considers the amount of down payment, total debt, and income to compute the credit score.

After all this data is collected, a scoring system awards points for each factor. For example, paying off bills on time will increase the credit score. In contrast, a higher utilization ratio of the amount of credit available to spend will affect the credit score adversely.

After all the calculations are done, the total number of points (credit score) is generated, which helps the lenders to predict the probability of repayment of the loan on time.

Difference between Credit Score and Credit Report 

It is really very important to discuss the difference between Credit Score and Credit Report. Most of the time, these two terms are used interchangeably. However, there is a thin line of the gap between both of them. A credit report is a detailed evaluation of your credit information.

On the other hand, a credit score is a small part that is added to the credit report. Your report will contain your current credit information, balances, payments, bankruptcies, personal information, etc.

After scrutinizing the entire story, finally, a score is derived, which is called as the credit score. It is a mathematical formula that is used to determine your score. FICCO is the leading score as per the market trends. A good score should range from 300 to 850. 

As a result, clear your dues on time, don’t keep unconsolidated debt, keep your balance accurate, maintain your ratio. Follow good practice and reach a good credit score. 

In case you wish to avail loans and have a smooth investment journey, having and maintaining a good credit score plays a vital role.

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Author Bio: Sakshi Kharbanda