Credit Score: Your credit score plays a vital role in shaping your financial health. In today’s time, when loans are a part of most people’s finances, credit score has a greater impact on your finances.
Recently, a doctor from South Mumbai won Rs 2.6 lakh in compensation due to a mistake made by his credit card issuer, which affected his credit score. In 2003, the doctor had paid his bill in full, but the credit card issuing bank mistakenly reported him as a defaulter. This caused the doctor’s credit score to drop significantly. However, armed with the necessary evidence and proof, the doctor approached several institutions seeking a solution. It took seven years for the credit card issuing bank to admit its mistake and close the case. While the issue of credit card dues was resolved, the incident severely damaged the doctor’s credit score, which continued to remain low.
To address the bank’s negligence, the doctor took legal action against them and the bank was held responsible for the impact of their error on the doctor’s credit score. This is one of many cases that highlight the importance of being vigilant about your credit score. In the spirit of Credit Score Awareness Week, BankBazaar CEO Adhil Shetty explains how your credit score is calculated and why it is important to review it regularly.
Know what is a credit score
Credit score reflects your ability to repay a loan and is a measure used by lenders to assess your financial health. A credit score is a three-digit number, typically ranging from 300 to 850. A credit score above 750 is considered high and can make loan approval easier with favourable terms and lower interest rates, saving you money. However, a low credit score can result in higher interest rates which will increase your EMIs and drain your savings faster.
How is a credit score calculated?
Your credit score is calculated based on several factors that reflect your financial behaviour. These include your payment history, credit utilisation ratio (current), length of your credit history, types of credit accounts you hold (credit cards or loans).
Who calculates your credit score?
Credit bureaus or credit reporting agencies collect data on your debts, and maintain your credit-related information to calculate and generate your credit score. There are four credit bureaus in India – TransUnion CIBIL, Experian, Equifax and CRIF High Mark. Each bureau collects data independently, so your credit score from each bureau may vary.
How does regular credit score review help?
Regular credit score checks can help you identify and flag errors in your credit report in time and correct it immediately. The earlier mentioned example shows how a bank’s mistake cost a doctor a heavy price.
Minimize the impact of fraudulent activities
With financial fraud on the rise, it has become even more important to monitor your credit score regularly. This can help you spot fraudulent/unauthorized transactions, suspicious inquiries, unknown accounts or identity theft that you may be a victim of and take immediate action.
Indicates your financial health
Your credit score is a helpful metric that reflects your financial situation. This knowledge is especially essential when you want to apply for loans, credit cards and other financial products.
Improve credit health
Keeping track of your credit score will let you know about your personal finance aspects that need improvement, such as reducing your credit utilization or making payments on time, which can maintain or increase your score over time.
Prepare for big purchases
Your credit score gives you an idea of your borrowing capacity. Check your score before applying for a loan or credit card to know what interest rates you may be eligible for.
Protects you from shocks
Regular tracking of your credit score ensures that you are aware of your credit status at all times and thus prevent harsh shocks like being offered higher interest rates or even loan rejections.
Finally
A high credit score portrays you as a responsible borrower to lenders. It is a gateway to favourable credit terms like lower interest rates. However, a low credit score puts you in a challenging position financially, such as being offered higher interest rates, unfavourable loan terms, or even loan rejections. If you are aware of gaps in your credit report, take proactive steps to fill them. Healthy financial habits like setting payment reminders, avoiding opening multiple accounts at once, paying off loans systematically, and not closing old credit accounts are some of the ways you can improve or maintain your credit score.
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