What is a Good Credit Score? – To answer this in short, a good credit score simplifies your life. This three-digit number can almost ruin your finances, but it can also make your life easier. Don’t worry if you have no idea what a credit score is or what it can do.
We’ve got you covered. This guide will explain what is a credit score, how it affects your financial life, and how to improve your score. This is one of the must-read articles and information to understand, especially if you are in your ’20s and just starting out in your financial life.
WHAT IS A CREDIT SCORE?
A credit score is a three-digit number between 300 and 850 that indicates a person’s creditworthiness. Financial institutions use credit scores when lending money to a potential customer; the higher the score, the better the chances of obtaining financial assistance. Credit history, such as the number of active accounts, repayment history, defaults if any, the total amount of debt, and other factors, all contribute to a person’s credit score.
How credit score works
A credit score has a direct impact on your financial life and is important when borrowing. For example, if a person’s credit score is between 580 and 620, they are classified as a subprime borrower. (Subprime borrowers are those who have a history of loan default or a bankruptcy record, as well as those who have low-income levels in comparison to their mortgage payment ability).
Subprime mortgages typically have higher interest rates than conventional mortgages to compensate for the additional risk.
A credit score of 700 or higher, on the other hand, is generally regarded as favorable and may result in a borrower receiving a lower interest rate, which means they will pay less money in interest over the life of the loan. Scores of 800 or higher are considered exceptional. Each creditor determines its own credit score range.
The ability to repay is the reason why lenders charge high-interest rates to customers with low credit scores and low-interest rates to customers with good credit. Lending and credit scores, on the other hand, advise the lender about the customer. As a result, the interest rate varies to avoid risk. Isn’t it fascinating? I hope you understand what a three-digit number can do.
Borrower Risk Profiles
What is a good credit score?
Credit information companies consider a credit score of 700 or higher to be good. You’re on the right track if your credit score is 680 and rising. I’ve gathered some country-specific data to provide a more in-depth overview.
average Credit score – India
AVG. CREDIT SCORE – UK
AVG. CREDIT SCORE – USA
|Age Group||Credit Score|
|Generation Z (18-24)||679|
|Generation X (41-56)||705|
|Baby Boomers (57-75)||740|
|Silent Generation (76+)||760|
Benefits of having a good credit score
1. Low-interest rates on credit cards
The interest rates and payments you make when borrowing money, and how much you pay are directly related to your credit score. If you keep a good credit score, you will almost certainly qualify for lower interest rates on credit cards and loans.
2. Approval for Higher Limits
Your borrowing power is determined by your income and credit score. One advantage of having a good credit score is that you will be eligible for a higher borrowing limit because you have demonstrated timely repayment of your borrowings.
3. Better Rewards
A higher credit score grants access to a broader range of credit cards as well as a higher credit limit. Cards expect good credit to be approved by rewards lenders. This includes both travel rewards cards, which can be used to pay for your entire vacation, and cash-back rewards cards, which give you a percentage of your spending back.
4. Easy Approval for Rental
A good credit score is also required for renting out property. Many landlords use credit scores as part of their screening process. Having a good credit history will make it easier to close deals. If you do not, you may be required to pay a larger deposit, sign a short-term lease, or even be denied housing entirely.
The Top Factors that Impact Your Credit Score
1. Payment History
Your payment history is the most important factor in determining your credit score because it shows whether you are dependable and consistent with your payments; even one or two late payments can harm your credit score. If you’ve been late for more than 90 days (even once), credit scoring models will assume you’ll do it again. This can have an impact on your credit profile and your ability to obtain credit or favourable rates.
2. Credit Card Utilization
The debt-to-limit ratio, also known as the credit utilisation ratio, calculates how much of your entire credit card limit you are using. The expert advice is to keep your credit usage proportion at or below 30%. A high credit utilisation ratio may be detrimental to your credit score.
You can calculate credit utilization yourself using this formula:
- Add up all of your credit card balances.
- Add together the credit limits on all of your cards.
- Subtract the total sum from the total credit limit.
- Divide your credit utilization ratio by 100 to get a percentage.
3. Credit History Length
As long as you have a history of consistent on-time payments on your open accounts, establishing a long credit history usually boosts your credit score. This component of your credit score is determined by factors such as the length of time you’ve had all of your credit accounts open.
4. Credit Mix
People with good credit typically have a diverse credit portfolio that includes a vehicle loan, credit card, school loan, mortgage, or other credit products. Credit scoring models look at the types of accounts you have and the quantity of them to determine how well you manage a wide range of credit products.
5. Number of Inquiries
Lenders do a hard check when you apply for new sorts of credit. It is used to measure your repayment potential and other characteristics, and it has a 20% impact on your credit score. Applying to multiple lenders may result in more difficult queries. Lenders that see a high number of recent enquiries may suspect you’re applying everywhere because you can’t get credit or are desperate for money.
How to improve credit score
1. Make timely payments
The longer you wait to pay, the lower your credit score will be. After seven years, late payments are usually removed from your credit report. As an example, A single 30-day late payment might reduce your credit score by 100 points.
2. Limit hard inquiries
Hard inquiries stay on your credit record for 24 months, and your credit score usually recovers within six months.
3. Foreclosure and repossession
For seven years, repossession or foreclosure will remain on your credit report. Make on-time payments and pay off debts to improve your credit score. The effect of a foreclosure on credit scores is determined by the lender. Some homeowners with good credit may see their scores decline by 100 points or more after a foreclosure.
4. Avoid several credit cards
Avoid using multiple credit cards at the same time in order to take advantage of offers, discounts, and points. Excessive credit usage has a negative impact on your credit score. The general rule is to keep no more than three active cards.
We performed a credit score survey and asked credit card users (ranging from college students to experienced financial leaders) for their responses to credit score frequently asked questions. The following are the answers to credit card customers’ inquiries.
Do many purchases affect credit score?
No. More purchases will have no impact on your credit score.
Does having a credit card help or hurt if I’m trying to build credit?
A credit card is useful and can help you boost your credit score if used carefully. When you have a credit card, it is tempting to make purchases. It should be highlighted that you spend the amount that allows you to pay the whole amount (not just the minimum) in the next billing cycle.
Why do the credit score and payment history matter to a Student?
As a student, you will always have limited cash or balance. Having a solid credit score and payment history will allow you to use services like buy now pay later and monthly contracts for larger goods that a student cannot afford in one go.
What are the common mistakes that people make in this area?
1. Overspending, poor planning, and a lack of technical expertise.
2. Purchasing items that exceed one’s means.
3. Failure to check billing cycle dates, making only the minimum payment for the billing cycle, over 80% of credit limit more frequently, extremely low or no credit card usage for an extended period of time, having more than three credit cards.
How do you maintain your credit score?
1. Paying bills on time and not using more than 30% of the total credit card amount.
2. On-time full bill payment, mixed buying and avoiding approaching threshold limitations, contracts/EMI purchases lasting no more than 6-12 months, and frequent credit score checks.
3. Using 20% of the credit on average every month and paying bills on time.
We hope you now have an idea of what a credit score is. We also recommend you start using credit apps like Credit Karma, or Experian if you live in the UK, Europe, or the USA for free. Credit Karma, Paytm, or CRED are some of the apps you can use to check your credit score if you live in India. Make on-time payments, monitor your credit score, be aware of your credit card usage, and enjoy your financial life.
What are your thoughts on using credit cards? Do you have any more suggestions for the readers? Please drop it in the comments below.
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