28 April 2020
A credit score is an important factor in one’s financial life. It is a three-digit number that financial organisations use to determine your likelihood of repaying a debt. Your credit score is based on your credit history, a record of all your past loans and credit transactions which assesses your ability to repay debts. Credit history includes information regarding your bankruptcies or collections, and all this information is recorded in a credit report. A credit score is usually a number between 300 to 850, and the better the score, the more likely that banks would approve for loans or a credit card. While it is possible to survive on a relatively low credit score, it makes your financial life unnecessarily difficult, and it is always better to have a healthy credit score.
A credit score is calculated differently by different banks and financial institutions, but a good credit score, as well as the factors deciding how high your score is, are usually the same in most methods of calculation. A credit score ranging between 650 and 750 is considered good, while one between 750 and 850 is considered exceptionally good by most financial institutions. Such a healthy credit score is achieved by timely loan and credit card repayment and also regular bill payments.
A healthy credit score has a lot of benefits in several aspects of one’s financial life, much beyond getting a credit card approved. Here are some of the major benefits of having a good credit score.
A bad credit score indicates a poor repayment record, and not many banks would take the risk of giving you credit since your record indicates that you don’t repay loans on time. A good credit score, on the other hand, indicates that you repay loans and pay your bills on time, which makes you credible in the eyes of financial institutions. It shows that you’re diligent and responsible about paying your bills and there is lower risk in taking you on as a borrower. Hence, banks and other financial institutions are more likely to approve your credit card or loan applications if you have a good credit score.
A long wait to get your loan or credit card approved is always a hassle. Your credit score determines the speed of approval of your credit applications. Loan applications of people with a low credit score undergo more thorough checks and hence take longer to approve (if they get approved at all). In contrast, several lenders offer pre-approved loans to people who have an excellent credit score coupled with a long credit history. This means that if you have a healthy credit score, your loan is likely to get approved fast, sometimes even immediately.
Whether on a credit card or a loan, high-interest rates are never good for your finances. In a recent development, several financial institutions have started offering tiered interest rates based on your credit scores, meaning that the interest you pay on your credit cards and loans is directly related to your credit score. A healthy credit score usually ensures lower interest rates on loans. Further, a good credit score will help you qualify for better credit card deals with lower interest rates, rewards and cashback.
Just like a bank or lender, a landlord may look at your credit score before renting you their apartment. A good credit score not only means that you repay your loans on time, but it also shows people that you’re regularly paying your bills, making you financially trustworthy. Getting your dream apartment would be much easier if your landlord can see through your credit score that you’re likely to pay your rent on time every month. If you get an apartment on a bad credit score, the landlord would probably charge you a higher security deposit to ensure that you pay the rent on time.
According to insurance companies, people with a bad credit score tend to file more claims than those with higher credit scores. Most insurance companies consider risk very carefully before offering insurance. While your credit score cannot determine whether you get insurance or not, companies tend to charge higher monthly premiums to people with low credit scores. However, some states in the USA like Massachusetts, California and Hawaii ban insurance companies from setting prices based on credit scores.
A good credit score has several benefits, including, but not limited to, a better likelihood of loan approvals. The benefits also include better credit card deals, better chances of landing your dream house for rent and even lower premium on insurance policies!