I'm a number that tells if you're good at managing money, High means banks trust you, Low means it's not sunny, Pay your bills on time, and I'll increase easily.
In this article, we will discuss the comprehensive nature of a credit score and how you can improve it.
A credit score is like your ultimate license for getting loans. Your credit score is not just a number; it carries a lot of weight. It describes your creditworthiness, the variety of credit accounts you have, how long you've had credit accounts open, how much of your available credit you're using, and if you've paid your bills on time and in full.
The credit score range varies from 300 to 850 and is divided into five categories: poor, fair, good, very good, and excellent. Let's break down these categories:
a) 800 to 850: Bingo, you can easily get credit!
This is a good credit score range, and getting credit is a breeze. Anything above 800 is a score that makes lenders very likely to lend you money. If you fall in this range, then you are considered to be a low-risk borrower.
b) 740 to 799: Wohoo, it's a YES!
This range is also the range where getting credit is easy. If you're in this range, it means you've demonstrated positive credit behavior, making it easier for lenders to approve your credit.
c) 670 to 739: Could be a yes!
Lenders will view this credit score as acceptable, but it depends on the creditor (they might say no, too). However, it's always advisable to keep working on your credit score.
d) 580 to 669: Hmm, this could take time.
Falling in this range could mean that a lender might have the right to deny. Individuals with such credit scores may be considered 'high risk' for the lender. So, you should start working on your credit score to make your credit portfolio friendlier.
e) 300 to 579: Uh-oh! This requires some work.
This requires some work. If you fall into this category, you're not getting any new credit. This is mainly because you have missed a lot of payments, have errors in your credit report, no job, insufficient income, limited credit history, and have a loan that has not been paid for a long time. It is highly recommended that you start taking steps to ensure your credit score goes high.
You can also refer to the above image for a better understanding of the credit score chart (range).
Now, you might be wondering how credit scores are calculated.
The credit score is calculated based on various factors derived from your financial behavior.
One key factor is your payment history, which reflects how consistently you've made payments on your credit accounts, loans, and bills. Timely payments positively impact your score, while missed or late payments can have a negative impact on it.
Another crucial element is the length of your credit history. This considers how long you've been using and responsibly managing credit. A longer credit history generally indicates more experience with borrowing and repaying, which can contribute positively to your credit score.
Additionally, your credit utilization rate plays a significant role. This is the ratio of your credit card balances to your credit limits. Keeping this ratio low demonstrates responsible credit usage and can boost your credit score.
Another important factor that affects your credit score is the type of credit that you have taken, such as a mortgage loan, car loan, education loan, etc. Having a mix of credit can be beneficial for your score.
The last important factor is the number of credit inquiries that you have applied for. Multiple inquiries can signal to your lender that you might be in financial trouble.
By understanding the above-mentioned factors that influence your score, you can take the following steps to manage your finances effectively and improve your creditworthiness over time.
How can you increase your credit score?
Understanding how to increase your credit score is important, as it reflects your financial responsibility towards your lenders. A higher credit score enhances your chances of loan approval, while a lower one can make it more challenging to secure loans. Follow these tips to gradually improve your credit score:
- Timely Bill Payments: Ensure you pay your credit card bills, loan EMIs, and other payments on time. Set up reminders to alert you of the timelines. Consistent timely payments significantly boost your credit score.
- Limit New Credit Applications: Multiple hard inquiries may lead lenders to believe you desperately seek credit, which can be perceived as a risk.
- Monitor Your Credit Report: Regularly check credit reports from credit bureaus like CIBIL (2 bureaus example). If you spot any errors, report them promptly.
- Build Credit History: Establishing a positive credit history is crucial for lenders to assess your creditworthiness. If you are new to credit or lack a credit history, consider obtaining a short-term personal loan or a secured/entry-level credit card to start building your credit profile.
- Manage Credit Utilization Ratio: Keep Credit Utilization Low: If you have a credit card, keep your credit utilization ratio (the amount of credit used compared to your credit limit) low. Aim for a utilization rate of around 30% or less to show responsible credit management.
By following these practices consistently, you can gradually improve your credit score and enhance your financial prospects.
Now that you know what a credit score is and how to manage it, it's also important to remember that it’s okay to take a loan as long as you have a repayment plan. Taking a loan without a repayment strategy will always lead to a debt trap. And if you're someone who is in debt and unable to manage your finances, then we are always here to help you. If you are looking for debt relief programs, click here.
FAQ’s on credit score range :
a) What credit score range is considered to be good?
A good credit score typically falls within the range of 850 to 900.
740-799: Good
670-739: Okay
580-669: Fair but needs to be worked
300-579: Poor
b) Why do credit score ranges vary?
Credit score ranges can differ due to various factors, including the scoring models used by different credit bureaus or Credit Information Companies (CICs). Each bureau employs distinct mathematical algorithms to calculate credit scores, leading to variations in score ranges.
c) What are the consequences of having a poor credit score?
If your CIBIL score falls into the poor or bad credit range, obtaining approval for an array of credit card loans can be challenging. Focus on enhancing and building your credit score to qualify for credit products with better terms and benefits.
d) How is the credit score calculated?
The credit score is calculated based on five main factors: payment history, amount of debt owed, new credit inquiries, length of credit history, and credit account diversity. Among these factors, the most crucial ones are your track record of timely payments and the proportion of credit you've utilized. It's important to note that applying for new credit can lead to a temporary dip in your credit score.
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