A credit score plays a very important role in your financial life, credit score stands for your creditworthiness. A good credit score makes your financial life much smoother, and if you have a very low credit score you will face some serious difficulties in getting a credit card or a loan.
To know how a credit score affects your life, you have to know how what is a credit score and how it is calculated.
- What is a Credit score?
A credit score is a three-digit number set by credit bureaus to show the worthiness of a customer. This number ranges between 300 to 850, and any credit score above 750 is a good credit score. When you apply for a loan, the financial institution determines the amount you are eligible for depending on your credit score.
- How Credit scores are calculated?
From time to time financial institutions send the information of their customers like their taken loan amount, unpaid dues, repayment history, etc. to the credit bureaus. The credit bureaus then score the customer by evaluating his/her credit history. Normally there are main five factors that play the most important role in determining your credit score.
- Repayment history: Credit bureaus keep a detailed record of your repayments, if you repay your taken loans or card bills in time, it will create a good impact on your credit score.
On the other hand, just a single unpaid card bill or EMI can affect your credit score severely.
- Credit Utilization ratio: The credit Utilization ratio (CUR) shows the percentage of your total credit limit that you have used. And it is suggested to keep your credit utilization ratio below 30%. If your CUR is higher than 30% it will mark you as a credit-hungry customer, also it will lower your CUR significantly.
- Credit Age: If you have a very good credit history, it can also help you to improve your credit score. Because a good credit history makes you a responsible customer.
- Credit Inquiries: Every time you apply for a loan or new credit card, the card provider or the lender initiates an inquiry for your credit score. And this can affect your credit score very badly.
- How credit score can affect your financial life?
A credit score plays a very important in your financial life a higher credit score makes you worthy of a big loan amount, higher credit limit, easy loan approval, and lots more. With a good credit score, you can also apply for a better credit card. So it is evident that having a good credit score is very important.
On the other hand, if your credit score is low, you will face several difficulties in your financial life, in other words, a bad credit score can affect your financial life. A higher credit utilization ratio, unpaid dues, and multiple credit applications can affect your credit score. A lower credit score can affect your daily life in these ways –
- While getting a loan: When you apply for a loan, your credit score determines whether you should get a loan and even its amount. With a good credit score, you can get approval for a higher loan amount with a low-interest rate.
On the other hand, if your credit score is low, it will be much difficult for you to get a higher loan amount, and you will have to pay a higher interest too.
- Credit Limit: The credit limit of your credit card depends on your credit score, if your credit score is dropping continuously, the card provider will reduce your total credit limit. And if you do not control your spending, your credit utilization ratio will be higher and it will also affect your credit score.
- Starting A new business: If you are going to start a new business, you will need a business loan. But if you have a lower credit score, you will be less worthy and you will not be able to get your desired loan amount, and you will have to pay a higher interest rate too.
- Relationship: If your business partners came to know about your low credit score, they will think you are in financial trouble and there is a possibility that they will try to get rid of you.
- Impact on personal life: Credit score also says if you pay your dues timely or not. Lenders also track your credit score, and if your credit score is decreasing regularly, they will send you legal notices. This can ruin your daily life.
So, it is evident that a lower credit score can affect your financial and daily life, therefore everyone should try to improve his/her credit score. A higher credit score can make your financial life much smoother.
And if you are facing some financial problems, you can request your lender for some time to repay your dues, it can save you from chaos. It takes longer to improve your credit score, so always try to keep your credit score stable.