Credit scores are the basis for lenders to decide whether to approve loan applications for a potential borrower.
Banks and lending apps in India have a mission to profitably lend to potential borrowers while safeguarding their interests. This decision is made primarily on the basis of one score – your Credit Score.
Credit score is an apt and official measure of your credit history (or paying off your debts to entities). One needs to understand that a credit score plays a pivotal role in determining the credit worthiness of a potential borrower.
How does Credit Score work?
Credit scores are the basis for lenders (like banks and other private lending entities) to decide whether to approve loan applications for a potential borrower. They also help them gauge what loan to offer – how much money, period, interest rate and other factors. The scores are created based on the borrowing and repayment history you have.
For example: If you take a loan from the Branch app or a bank, a report on how much money is borrowed and your repayment history will be shared with the four official credit bureaus on a regular basis. If you pay the money back on time, your score is likely to go up but if you default, (or worse become delinquent), the score will go down. This lower score means you will not only be able to take another loan from the same lender but also any other lending companies as credit scores are the basis of underwriting the risk of lending universally.
Now let’s look at the main factors that affect your credit score.
1. Payment history – have you missed or defaulted on your payment and for how long?
2. Current debt: How much money do you owe till date? And even how many debt lines have you closed.
3. Length of credit: How long have you been borrowing?
4. New credit: Have you applied for loans recently
5. Types of credit: What type of loans are you having – auto, home etc?
Here are a few reasons why a good credit score will always be your trusted aide:
There are many employers who carry out regular credit checks as part of their hiring process. Hence, if your score is iffy, they might think twice before getting you onboard. The reason behind this simple – the employer will be forced to believe that your debt is way too high for the salary offered and that your financial stability is not too great which will impede your progress.
Planning to buy or rent a house, check your score
It has become the norm – banks or even mortgage lenders will always want to be convinced that you can repay the loans. Hence, if you do not have good credit, they will hesitate before offering you a home loan.
Even if you have been given a home loan, the credit beside your name has a direct impact on the interest rate and this rate will have a knock-on impact on your EMI payment. Now, if you are looking to rent a house, landlords might well seek your credit score since property rental is also a type of a loan and hence, owners need to be convinced that you will be able to pay off the rent.
Getting a new car? Your interest rates will be key
The importance of a good credit score impacts your eligibility to get an auto loan as well as the interest which will be levied on this loan. As is the norm, loan applicants that have a good and healthy credit rating are eligible to bag a larger loan with lower rates of interests as opposed to people with a lower credit rating.
There will be very few lenders who will be willing to dole out an amount as they will not be too enthused with your history. Even if they do sanction the loan, the interest will be much higher which will result in you paying an exorbitant amount over time.
Want to start a business? Maintain a good credit score
Even a small start-up needs a substantial amount of money to get things rolling. As such, you will need to look at availing a business loan and lenders will look at your credit score before they are convinced you qualify for the business loan.
The same holds true for getting the right insurance policy and premium.
No one likes a bad credit score. Thus, your aim should be to always keep the score above 700.
As soon as you drag the score over 700, you are deemed good risk. If the score is above 760, you are golden and this is when you will be able to get the best rates and terms lenders have to offer since they will be assured you will be back to repay everything as soon as you become capable. You should make it a practice to monitor your score and the score factors for free though apps like Branch.
This is essentially the power of a good credit score. Lenders will be willing to extend a loan and you will not have to splash around. Keep a track of your finances, keep checking your score and hey, never overspend. It is your money after all!
(By Matthew Flannery, CEO & Cofounder, Branch International Finance App)