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Unlocking the Mystery of Credit Scores
Fun Finds
Ending on a High Note…
Unlocking the Mystery of Credit Scores
The CIBIL score. Three little words strike fear into the hearts of borrowers, yet hold the key to financial freedom. It's a number that can make or break your loan application, determine the interest rate on your credit card, and even affect your ability for a mortgage. The struggle is real for those who have felt the sting of a low score. But fear not, understanding the CIBIL score is the first step towards taking control of your financial destiny.
Credit scores are a numerical representation of a borrower's creditworthiness. The score is based on a number of factors, including payment history, credit utilization, length of credit history, new credit, and credit mix. Credit scores range from 350 to 900, with higher scores indicating better creditworthiness.
If your credit score is at least 750, you will be eligible for the highest number of credit cards and you will also have a greater likelihood of being approved for any loan.
What be the constituents of your credit score?
Payment History (35%)
When it comes to tallying up your creditworthiness, nothing weighs heavier than your payment history. A single slip-up, whether it be small or big, can drag your score through the mud. What's more, it signals to potential lenders that you may default on payments down the line. To keep your credit score shining, pay your dues promptly and keep those loans and cards in check.
Credit Utilization (30%)
Credit utilization measures how much of your plastic you've spent in a month, divided by your total credit limit. Say your credit limit is a cool one lakh, and you've spent fifty thousand - then your utilization hits 50%. But if you're maxing out your limit, you're telling lenders you're not the best at handling your money. So, to keep creditors off your back, don't blow your entire credit limit.
Length of Credit History (15%)
Your age doesn't count for squat when credit bureaus calculate your score, but the length of your credit history sure does. They take into account the span between your first and most recent loans or cards, and the average age of all your accounts put together. The longer your first account has been open, the better your score.
Mix of Credit (10%)
Your mix of credit describes the variety of accounts listed on your credit report. There are two kinds of credit accounts: instalment-based loans and revolving credit cards. When you've got a mix of both, it shows lenders you can handle all sorts of credit products. And that makes you a good catch in their eyes.
For eg., a mortgage loan, personal loan or consumer loan, credit cards etc.,
New Credit (10%)
Your recent credit history depends on the number of fresh accounts you've opened and the credit schemes you've sought after. Each time you request a loan or card, the lender's inquiry goes hard. That means they peek at your credit report from the bureaus to rate your score and trustworthiness. Soft inquiries - when you check your score yourself - don't affect your credit, but too many hard ones over a short period sure can. It'll tank your score in no time flat.
What's in your credit report?
Basic identification information
A list of your credit accounts
Your credit history (whom you’ve paid, how consistently you paid, and any late payments)
Amount of loans
Credit inquiries or who else has requested your credit information (e.g., other lenders)
Your choices affect your credit score
Consider two friends, Friend 1 and Friend 2, each earning about 18 lakhs a year.
Friend 1 is diligent, setting aside a portion of their earnings each month and consistently meeting their credit card and mortgage payments. Meanwhile,
Friend 2 lives recklessly, exceeding their financial means, pushing their credit limits, and missing payments on occasion.
Friend 1 and Friend 2 both applied for a loan at the bank. In light of their financial backgrounds, who do you think would be granted approval or a favourable interest rate?
It is more likely that Friend 1 would be granted loan approval or receive a better interest rate from the bank. This is because lenders typically favour individuals with a positive credit history and a proven track record of financial responsibility. On the other hand, Friend 2's poor credit history and missed payments could result in a higher interest rate or even loan denial.
To save time, lenders created the credit score, which considers your complete financial background. Obtaining and utilizing a credit card is the simplest way to begin establishing your credit score.
Boost thy credit score: a concise guide
Get out of unnecessary debt fast
Keep your accounts open
Keep your utilization ratio around 5-10% and never cross more than 30%
Never miss a payment and always pay in full every month
Start using a credit card and never unconsciously apply for another credit card when you don’t need one.
Fun Finds
Food
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Ending on a High Note…
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Bragging Rights
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