Do you know that credit score is an important number that plays a key role in determining your creditworthiness? The banks, NBFCs, and other lenders check this 3-digit number and decide whether to approve your loan. Your credit score also influences interest rates, loan terms, and more.
Since this is a critical number that impacts your financial well-being, it is essential to learn more about it. Know what a credit score is, how it is calculated, and why it is important. We also answer commonly asked questions about credit scores.
What is a Credit Score?
A credit score is a three-digit number that ranges between 300 to 900, depending on the type of credit bureau. This number is important for creditors and other financial companies to understand whether it is risky to lend you credit. The lenders are unsure to extend loans and credit to the borrowers with a poor credit score. With an excellent credit score, you can quickly get lines of credit.
How are Credit Scores Calculated?
Credit reporting companies calculate your credit score. These companies gather your credit information from your lenders and assemble the same into a credit report. The creditors need not report the same to the credit bureaus.
Credit scores are based on the following:
- Your payment history
- Unpaid balance/ default
- Use of credit limit
- The number of new credit applications
- The mix of credit accounts like credit cards, mortgages, personal loans, car loans, student loans, etc.
The most critical thing that can improve or compromise your credit score is your payment history. You will have a great credit score if you pay your monthly dues without any delay. The factors that do not affect your credit score include religion, caste, salary, occupation, location, gender, etc.
What are the Different Credit Scores?
The credit bureaus collect the credit information from all banks and NBFCs and in turn rate the credit scores between the range from 300 to 900. The credit score ranges include:
- 300–579: Poor
- 580–669: Fair
- 670–739: Good
- 740–799: Very Good
- 800–900: Exceptional
According to many studies, the credit score of an average Indian was around 700. To know your credit score and get a free credit report, connect with duefactory.com.
Why is Credit Score Important?
A credit score is a crucial number for a variety of reasons:
- A credit score is evidence of your financial stability. While a good credit score means a borrower’s commitment to financial obligations, a poor credit score means questionable repayment behavior.
- A low credit score could disqualify you from getting a new loan approved.
- The lenders also decide the interest rate according to your credit score. A bad credit score can prove to be expensive. Even if you get approved for loans or credit cards, you may have to bear expensive interest rates. The people with great credit scores may avail the loans at a favorable interest.
- A good credit score often fetches lucrative discounts and deals.
- A high score also allows you access to better loan terms. You can negotiate better terms, flexibility in repayment, special deals, competitive interest rates, longer loan tenure, no extra charges for loan repayment, etc.
- People with impressive credit scores get a higher limit on their credit cards as they have proven credibility as disciplined borrowers.
Wrapping Up
It is important to understand your credit score and know how it is important. A good credit score opens doors for various types of financial help and gives you a financially secure life. This number determines your ability to get loans on better terms and exhibits you as a responsible borrower managing money effectively.
Now that you know, ‘What is a Credit Score and Why Does it Matter?’, know how to enter 800 credit score club in this Due Factory blog.
Disclaimer: This article provides a general guide to the subject matter. You should take a professional advice about your specific case.
FAQs
1. What is a credit score?
Ans. A credit score is a financial three-digit number that determines your creditworthiness. When you apply for a loan or a credit card, the lender checks your credit score and decides whether to approve the loan, interest rate and other loan terms.
2. What is a good Experian Credit Score?
Ans. A credit score of more than 670 is considered good. A higher credit score indicates that a borrower is less likely to default on the loan or credit obligations.
3. Why is a credit score important?
Ans. Credit score determines your chances of getting approved for a loan or credit card. It also determines your interest rate, loan terms, etc.
4. What factors are considered while calculating credit scores?
Ans. Your credit score is calculated according to your payment history, credit utilization, credit mix, credit length, new credit applications, etc.
5. Which factors will not affect my credit score?
Ans. The factors that do not affect your credit score include religion, caste, salary, occupation, location, gender, etc.