Credit Score

Guide To Building And Understanding Your Credit Score

Your credit score is a powerful financial tool that can shape your financial future and a good credit score can open relevant doors. Building a strong credit score is a gradual process that requires discipline and financial responsibility

Sethurathnam Ravi
Photo Credit : Zee Business

The average credit score for Indians last year was 715 as per a credit monitoring platform. While this number maybe considered decent there is a lot of scope for improvement. One needs to understand clearly that your credit score is more than just a number; it’s a financial passport that opens doors to a world of opportunities or can easily constrain your financial journey too. 

A credit score is a numerical representation of your creditworthiness, a snapshot of your ability to manage credit responsibly. Ranging from 300 to 850, a higher score indicates a lower credit risk. In today’s financial landscape, having a strong credit score is crucial for various aspects of your financial life. Whether you’re applying for a mortgage, car loan, or even a credit card, your credit score plays a pivotal role in determining your eligibility and the interest rates you’ll be offered. Building and maintaining a strong credit score requires a strategic approach and disciplined financial habits.

Several factors will influence the trajectory of your credit score and some of key components include factors like your payment history. Timely payments on credit cards, loans, and other financial obligations significantly boost your credit score. Consistently paying bills by the due date demonstrates responsible financial behavior. Secondly the credit utilization which includes the ratio of your credit card balances to your credit limits, is a crucial factor. Keeping this ratio below 30% indicates responsible credit management.

The longer your credit history, the more information lenders have to assess your creditworthiness. Keeping older accounts open positively influences this aspect of your credit score. Even a diverse mix of credit accounts, such as credit cards, installment loans, and retail accounts, contributes positively to your credit score. However, it’s crucial to manage these accounts responsibly. However, one has to be vigilant that opening multiple credit accounts within a short period can negatively impact your credit score. Be cautious about unnecessary credit inquiries and only apply for new credit when necessary.

Building a strong credit score is a proactive process that requires diligence and strategic financial planning. Start by creating a budget and living within your means. Ensure timely payments of bills and set up automatic reminders to avoid missed due dates, else it is very easy to get consumed by credit burdens.

One can also regularly obtain and review your credit reports from major bureaus for inaccuracies. Dispute any errors promptly, as they can adversely affect your credit score. Try keeping credit card balances below 30% of your credit limits and aim to pay off balances in full each month to avoid accruing interest. Apply for new credit judiciously, as multiple inquiries in a short period can temporarily lower your credit score.

Pros and Cons of Credit Scores
A high credit score opens doors to better financial opportunities, such as lower interest rates on loans, credit cards with favorable terms, and higher credit limits. It gives you negotiating power when dealing with lenders. You can leverage your creditworthiness to secure better terms on loans and credit. Some insurance companies use credit scores to determine premiums. A higher credit score may result in lower insurance costs.

 On the other hand low credit score can lead to loan denials or approvals with higher interest rates, limiting your access to credit. Sometimes landlords may use credit scores as a criterion for renting a home. A poor credit score might make it challenging to secure a rental agreement. With a lower credit score, you are more likely to receive loans and credit cards with higher interest rates, leading to increased overall borrowing costs.

It is always important to understand the factors that influence your credit score and how financial decisions impact your creditworthiness. Only borrow what you can afford to repay and use credit cards judiciously. Avoid maxing out credit limits and paying off balances on time. Stay informed about your credit status by regularly checking your credit reports. Build an emergency fund to cover unexpected expenses, reducing the likelihood of missing bill payments. Lastly, if you find yourself struggling with credit issues, consider seeking advice from financial counsellors or credit repair professionals to guide you on the path to improvement. Your credit score is a powerful financial tool that can shape your financial future and a good credit score can open relevant doors. Building a strong credit score is a gradual process that requires discipline and financial responsibility. 

The RBI through this master direction, recognizing the increased relevance of IT infrastructure in the financial services space, has detailed the mandatory implementation and review of the IT systems and applications in order to keep a check on the processes, data security and integrity, disaster recovery management as well as business continuity in order to protect the interest of various stakeholders including customers. The directions mandate the adoption of several procedures and processes like IT Strategic Planning, Service Level Management (SLM), product approval and quality assurance process (for new IT-based business products) in order to ensure that the banking sector delivers secure products and services to its clients. In this era of digitisation and increasing threats, the master direction provides the required structure and procedures to secure banking systems.

S Ravi
S Ravi

The author is a practising chartered accountant and an independent director on many large public companies whose views and ideas have been instrumental in framing policy

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