Gone are the days when owning a property, gold or car would suffice for a person to be deemed ¡®financially strong¡¯. With changing times, it's not just the science or technology sectors that have witnessed numerous upgrades, even the financial sector has undergone a lot and witnessed developments to a great extent. And one such change has been the evolution of credit score and its importance as well as significance in the process of lending.?
Over the years, with changing lifestyles, spending habits, mindsets, priorities and perspectives of people, even financial institutions felt the need to adopt a common metric to assess you, the applicant/borrower¡¯s creditworthiness. This is exactly what the purpose of a credit score is. By displaying your credit repayment history and behaviour, it offers insight for financial institutions to assess your degree of credit risk, i.e. the possibility of defaulting on payments in future. While the presence of a high credit score can turn out to be a boon for your financial health in more ways than one, a low credit score, on the flip side, holds the capacity to harm your finances in multiple ways.?
And all this holds especially true for us millennials who love to follow the YOLO (you only live once) motto and don't shy away from living our present to the fullest with the help of loans and credit cards, each of which includes the involvement of credit score during the evaluation process.?
So, if you are eager to know how a credit score can be your financial best friend, read on as we unfold this and explain the benefits of making credit score your financial buddy.
Whenever you apply for any loan, lenders (including banks, NBFCs, Fintechs, etc)?assess your creditworthiness by fetching your credit report from the credit bureaus. Your credit score, which is a three-digit numerical representation of your credit repayment history, is based on the information mentioned in your credit report. A credit report lists a summary of your credit accounts like loans and credit cards and their repayment history, besides mentioning your credit score as well.??
If you have a?¡¯good¡¯ credit?score?of around 750 or above, you?tend to possess higher chances of loan approval, since you are considered financially more disciplined in the eyes of lenders and hence,?involve a?lower risk of defaulting on repayments in future. And since credit score¡¯s importance makes it one of the first filters to be factored in during application evaluations, the presence of a good credit score paves way for you to gain higher eligibility and chances of getting your loan application approved.
Also Read:?Things That Impact Millennials' Credit Score That They Don't Even Know About
More and more lenders?have started practising?an approach called risk-based pricing for setting?lending?interest?rates?of loan applicants. Given that possessing a good credit score makes you a consumer with lower?credit?risk in the eyes of lenders, they try to?entice?you and other such prospective borrowers?by rewarding their credit discipline through lower interest rates.?
That's what the risk-based pricing model is for. In this, those with high credit scores are offered lower interest rates on loans, whereas those with no or low credit scores are charged higher lending rates due to the involvement of higher credit risk.?
Besides being a source of availing instant?credit,?credit?cards offer a long list of other benefits as well, like?discounts, cash backs, reward points, no-cost EMIs, loans against credit cards etc. However,?just like loans,?credit cards too are a form of credit, and hence credit?card issuers?factor in your credit?score?while evaluating?credit?card applications. So, those with?good?credit?scores?have higher chances of?getting their?credit?card application approved.
Moreover, a good?credit?score?can also?open doors to benefits like fetching higher credit?limit or getting it increased periodically,? availing better credit cards through offers from other issuers (like in case of loans wherein borrowers having disciplined repayment history are enticed through balance transfer option at lucrative rates and service terms by other lenders), getting your credit card upgraded from the existing issuer and qualifying for the pre-approved loan against credit card facility as well.
Also Read:?Why Do Millennials Fall Into Credit Card Debt Trap?
Another key benefit of having a good credit score is that it opens the gateway to pre-approved loans from various lenders. As their name suggests, pre-approved loans are loans that are pre-qualified in nature and offer in-principal approval to the target consumers, who are usually those with a history of disciplined repayments and hence, a good credit score. Both your existing lenders and other new lenders can pitch pre-approved loans to you, which also have relatively quicker disbursals, in case you are a borrower who possesses a good credit score. Besides this, such pre-approved loans may also have better product features, lower?interest rates and lower processing charges as well.
Credit score¡¯s benefits do not lapse once you have got your loan approved. Even during your loan repayment tenure, especially for big-ticket loans like home loans, maintaining a good credit score can fetch you better deals on your current outstanding loan, through balance transfer options. As those with good credit scores tend to involve lower credit risk for lenders, they often?attempt?to?lure?such existing borrowers of other lenders, who have a good credit score by offering balance transfer options at lower interest rates. This way the lender gets a new customer who already has a good credit profile, whereas you, the borrower, gets to lower your overall interest cost on the loan, hence a win-win situation for both!
Also Read:?How Millennials Can Kickstart 2022 On A Financially Strong Note
Summing it up, with plenty of financial benefits that a good credit score offers, it's no brainer as to why it should be your new financial buddy, right?? So without further ado, kickstart your journey towards building and maintaining a good credit score, and watch your financial health breathe the much needed fresh air with the new set of benefits unlocked by a good credit score!
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