F(N)AQ: Why Should You Care About Your Credit Score?

To understand the role of credit score, its important that you first get to know this concept.

Simply put, credit score is a three-digit numerical representation of your credit history and generally ranges between 300-900. It depicts how well you have been handling your debt repayments on the basis of your past repayment behavior towards your loan EMIs and credit card bills.? Now let's move on to the next question.

Also Read: How To Choose The Right Credit Card For Yourself

Your credit score is computed by credit bureaus based on the information included in your credit report, which contains the summary of your current outstanding loans, past credit accounts and existing credit card balances, besides other credit-related information as well.?

At present, there are 4 credit bureaus in India- CIBIL, Equifax, Experian and Crif Highmark. Each of these four credit bureaus has its own scoring parameters and mechanism to compute credit score and assign weightage to the involved parameters.

Also Read:?Why It's Important For Millennials To Check Their Credit Report Every Month

Credit score is used as one of the first filters factored in by financial institutions while evaluating your loan and credit card applications. It helps the lender to assess your creditworthiness through past repayment behavior, which also indicates the degree of likelihood of you defaulting on the loan/credit card repayments in future.?

While a good credit score of usually 750 and above will depict you as more trustworthy in terms of credit repayment, a low credit score, on the flip side, would make the lender take a cautious approach when deciding whether to accept or reject your application.

As far as ‘new to credit consumers’ are concerned, i.e. those who do not have credit score, implying a nil/zero credit score since they have not taken any form of credit, whether loan or credit card yet, financial institutions may even tread cautiously before approving their application.?

This is because, the absence of credit history that shows your past loan and credit card repayment behavior, leaves a doubt in the mind for the lender, as to how you may turn out as a borrower and the degree of risk involved pertaining to your defaulting in future.

Credit score’s role has gradually widened towards also being amongst the parameters upon which lenders are setting interest rates to be charged from varying customers. Those having a higher credit score are likely to get a cheaper loan and better service terms than someone having a poor or now credit score.?

It's also been noticed in past few years that some sectors/industry’s companies have been even including credit score checks as part of job applicant’s background checks, because undisciplined financial repayment history may be an indicator of possible indiscipline in other aspects of life as well, which might be perceived negatively by the employer and make them hesitant to accept your application and offer you the job.

Also Read: Stop These 5 Everyday Money Habits That Are Harming Your Credit Score

If you were asked to lend money to someone who has a history of not handling loans or credit card payments properly? You would think twice before even considering lending them money, right??

Similar is the case with financial institutions.?

Whether you have a poor credit score due to poor financial habits towards repayments or simply do not have a credit score due to lack of credit history, lenders are likely to either reject your application, or charge higher interest rates vis-a-vis those who have high credit score. This is primarily due to the higher degree of credit risk (risk of default) that people with low or no credit score pose for the lender.

Although the 4 credit bureaus tend to have different credit score calculation mechanisms and the respective weightage that they give to numerous factors, these are the major factors taken into consideration by the credit bureaus:
1.Repayment history of credit card bills and loan EMIs
2.Credit mix
3.Credit utilization ratio
4.Credit enquiries?
5.Co-signed/ guaranteed loans?
6.Age of credit history
To deep dive and understand each of these factors, click here.

Also Read:?5 Money Mistakes All Millennials Should Avoid in 2022

Once you know the factors and habits that impact your credit score and its calculation, you are better positioned to act accordingly to build and maintain a high credit score.?

But the first step towards creating a credit score, is building your credit history. So, let's dig deeper to know how to build your credit history.

As loans and credit cards are the two forms of credit you can take for building your credit history, and the former has compulsory interest cost attached to it, it becomes prudent to start building your credit history by using credit cards.?

While credit cards too involve interest in the form of finance charges, those are only levied if you do not repay the bills timely and in full.?

So, discipline usage and repayment of credit cards can be your first step to gradually build a good credit score. This can be your key to unlocking better deals on loans and credit cards in future, besides boosting approval chances as well.

Now, it might be difficult for some millennials to get approval for regular credit cards, due to lack of credit history, insufficient income,? etc. But don't worry, that's not the end of the road. Such millennials can go for secured credit cards!?

To know more about secured credit cards, click here.

Also Read: 5 Super Benefits Of Credit Cards That Will Make Millennials Say Yes To Them In 2022