On World Health Day, we’d like to talk about a subject not all of us fully understand – Financial Health! Just like our physical well-being is represented through numerical values (Eg. Stable Blood pressure = 120/80), our financial health is represented through a Credit score. A 3-digit number that can affect your financial life.
If you look up “Credit Score” on Google, the results would explain the term in a very complex way. Definitely, not helpful! Here’s how simple it is:
A credit score plays a key role in determining whether a lender will give you credit in the future. For instance, if you apply for a loan tomorrow be it for a car, a house, a holiday or a new work project, a lender will measure your creditworthiness using this score – are you worth giving a loan to? It helps credit agencies understand whether you’re worth the risk. Can they trust you to repay your loan on time? The score ranges from 300-900 and the higher the number, the more likely you are to benefit from lower interest rates and better loan terms when applying for a loan. Meanwhile, a poor number doesn’t necessarily mean that you won’t get a loan but it does denote that you’re a greater risk and to make up for that risk, a lender will charge you higher interest rates. So how does one maintain a good credit score?
Here are some of the factors that contribute to a good credit score:
- Payment history – If you’re paying your bills on time, you’re already at an advantage.
- Amount Owed – Do not spend more than 30% of your limit on credit cards. Maxed out cards are a big no-no.
- Length of credit history – A longer credit history is good for your score. So, it’s advisable to start using credit cards at an early stage in life to build a credit history. Just remember to clear your dues on time.
- Types of credit – What kind of loans have you been taking – vehicle, credit cards, mortgage. Different types of debt that are paid in time, improve your score.
- Multiple lines of credit – Avoid too many new lines of credit in a short period of time
As long as you have a clean payment history and good credit utilization, that is half the battle won. It’s important to note, that your credit score will never be based on your personal information like gender, caste, religion, nationality or marital status. Your credit score is purely based on your financial habits.
Get your free Credit Score here.