Why a credit score is essential to your financial health
If we had a dime for the number of times we heard the cliched phrase “health is wealth,” we’d all be millionaires.
Undoubtedly, this saying is absolutely true. Only if you are healthy can you enjoy your wealth. But did you know that the health of your credit history also affects your wealth? Your credit history is an essential part of your financial life. Here’s why you need to maintain a good credit history.
Every person comes across a time in their life when they need extra help with their finances. A loan is useful in such a situation. It’s no surprise that working professionals are increasingly opting for loans to buy a home or spend money on travel. Many people also opt for other forms of credit like a credit card to get various benefits like cash back, rewards redemption, and discounts.
Another buzzword in the industry is a line of credit, which allows you to be ready to meet any unexpected expense encountered at any time. The process to attain these credit options is quite simple. You can choose a lender and apply offline. Alternatively, you can compare multiple lenders online and apply through online portals. Even though the process is simple, there is one important factor to keep in mind before you start.
When you apply for a credit card, a loan, or even a line of credit, your lender will definitely check your credit score. They will decide how much risk you pose to them, or in other words, how creditworthy you are, through your credit score.
A credit report is what determines whether or not you qualify for any type of credit, and if it is an interest rate, your credit score will also be one of the most crucial factors for determine it.
If you have low or bad credit, lenders won’t necessarily avoid you, but rather allow you to borrow money at a higher rate (sometimes much higher) than the interest rate paid by someone with a better credit rating.
Having a good credit rating isn’t rocket science and will take a lot of effort. It’s a pretty simple concept. Once you understand how it works, resting will be a breeze. Here are some things you need to keep in mind in order to ensure you have a good credit score –
- If you have a credit card, it is crucial that you pay your bill before the due date and in full. Payment of partial balances may result in accumulation of interest and debt. This will negatively affect your credit score.
- If you have outstanding loans, be sure to pay EMIs on time. Any EMI default will be reported and will negatively impact your credit score.
- Check your credit report frequently to watch for any fraudulent transactions. It will also help you track the progress you are making.
- Don’t use your entire credit card limit, keep your credit utilization rate as low as possible.
- Don’t apply to too many lenders at once, every serious inquiry has a negative impact on your credit score.
Besides these factors that determine your credit score, there are things that also affect the approval of your loans and credit cards. For example, one should always consider their debt-to-income ratio before approaching a particular lender.
Chances are that if you have too much existing debt, the lender will be hesitant to give you another loan. This is because you are portrayed as a risky borrower.
Another factor could be that your contact information could be wrong on your credit file. For example, you might have an old address, where a defaulter resided. It is very likely that the address will be blacklisted by lenders, and your loan application will not be accepted.
Using credit responsibly is key to having a good credit rating. And maintaining a good credit score is crucial if you want to benefit from any type of credit in the future. In order to get the best personal loan and credit card deals, one must always maintain a good credit rating.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)