Credit Score – How It Makes Your Credit Soar Or Sore

Credit score is a numerical value about an individual’s creditworthiness. This score helps lenders decide how likely a person will repay his/her loans in time. It plays a major role in determining a person’s eligibility for financial assistance in the form of loans. Therefore it is very important to pay one’s bills on time. Deferred payments are explicitly discouraged.

Here are some of the reasons why a person’s credit score is very important!

Credit score determines one’s creditworthiness

Credit score is used as a quick and highly reliable source by banks and financial institutions to judge an individual’s credit management record. A strong credit score would mean that the lender might be willing to approve a loan with favorable terms and conditions at lower rates of interest. A good score would give them a sense of assurance about the reliability of an individual. Simply put, a person’s credit score mirrors their payment habits.

Later the payment, lower the score

It has been found that a late payment of 30 days could drop the score up to 100 points. The same finding showed that a late payment of 90 days could damage the credit score for up to 7 years and deferring the payment for more than 120 days could “charge off” a person’s debt to a third party and this is further shown in the credit report. It also depends on the type of loan- in case of credit cards the damage may not be as much but if it is a monthly EMI, then the damage could last up to 2 years.

Law of credit score

Credit score and interest rates have an inverse relationship. Higher the credit score, higher the possibilities of the individual’s loans getting approved at lower interest rates. Lower credit score warrants a high interest rate with lower possibilities of the loan approval

A series of late payments is most inadvisable

One late payment, though inadvisable, can be compensated by diligent and prompt payment in the future. But that would not work if a person is a serial defaulter. A continuance of non-payment of loans can damage the credit report to an significant extent. It would be what one calls “digging your own grave”.

Credit score is a person’s reputation

The first thing banks do when a person applies for a loan is conduct background checks with credit information companies. They can know a person’s credit activities along with his/her reputation and reliability to pay back their dues. Hence a good credit score speaks volumes about one’s financial discipline.

Deferred payments and low creditworthiness are not just concerns for the customer but also the lender who relies highly on the credit score and report before approving any loan.

With all that said, here are some ways to maintain or improve your credit score:

  • Pay your bills on time- every time. It has the greatest impact on your score. Set reminders or opt for online automatic payment so that you don’t miss the deadline.
  • Do not get close to the credit limit. It is the limit that financial institutions extend to any debtor. Experts advise a person to keep the score at no more than 30% of total credit limit.
  • A history of credit keeping and paying can go a long way in showing creditworthiness. It improves over time when a person has different accounts and pay what they owe on time.
  • It is important to apply only for credit a person would need and nothing more.
  • Lastly- make well informed and well planned decisions when it comes to your credit.