There are many financial metrics that give third parties like lenders and employers a good bit of insight into your financial situation and habits. Of these, the credit score is perhaps the most important number. Interestingly, not many people understand how this number impacts your financial situation and your financial future.
To get a better idea of why this number is important, let us first find out what it is all about.
What is a Credit Score
A credit score is a number that is calculated by credit information companies. It is a measure of the creditworthiness of an individual. The higher your credit score is, the more creditworthy you are considered to be.
Your credit score is affected by a number of factors such as the following —
- Your repayment history
- Your credit utilisation ratio
- Your credit mix
- The length of your credit history
- The number of credit enquiries
This score is calculated by credit information companies such as the TransUnion CIBIL Limited, Equifax and Experian. Of these, the score computed by the TransUnion CIBIL Limited, which is popularly known as the CIBIL score, is the most commonly used.
How Your Credit Score Impacts Your Financial Future
Your credit score affects your daily finances and your financial future in many ways. Understanding the impact of this number on your financial situation can help you stay ahead of the curve.
Check out the different aspects of your personal finances that your credit score can affect.
Your Credit Limit
If your credit score is above 750, it is considered to be a good one by lenders and banks. The higher your credit score, the more the credit limit available on your credit card will be. In this manner, your credit score affects the amount of credit you have available to you.
Your Loan Eligibility
The CIBIL score or other credit scores also directly impact your eligibility for different types of loans. Banks and other non-banking financial institutions generally do not offer financing to people with low credit scores. If your score is low, you may have to resort to other loans that carry high interest rates.
Your Financial Goals
Many life goals like buying or building your own house, or purchasing a new car may require external financing. If your credit score is high, you will find it easier to get loans at favourable interest rates. This will, in turn, make it easier for you to achieve your future financial goals.
Your New Business
In case you are planning to start your own business, you will require some kind of external financing to lay the foundation of your venture. Even if you have some capital to begin with, you may need a loan later, to meet your business venture’s cash flow needs or to open a new branch. At such junctures, your credit score is of crucial importance since it determines your eligibility for a business loan.
How to Improve your CIBIL Score
If your credit score or your CIBIL score is currently low, you can take some measures to improve this number. Here are some tips on how to improve your CIBIL score.
- Repay your credit card dues within the due date
- Pay your loan EMIs promptly, as and when they are due
- Use only 30% or less of the credit limit available to you
- Ensure that you use a mix of credit like loans, credit cards, etc.
- Check your CIBIL report for errors and rectify them on time
This should help you understand why your credit score is important, as well as how you can improve it if it is below 750. Make sure you check your credit score periodically to verify that you are still eligible for the best credit facilities in the financial market.