Understanding Credit Scores and How to Improve Yours

More than a three-digit number, your credit score is not just a random figure, it holds significant importance in your financial journey. Think of it like this: Your credit score is your exclusive backstage pass to the financial performance, it's the VIP ticket that decides if you'll be enjoying front-row seats or watching from the balcony.

What is considered as a good credit score?

Credit score ranges vary based on the scoring model used. Typically, a higher score increases your chances of getting approved for credit.The average credit score for Indians in the financial year 2021-22 was reported as 715 by OneScore

What factors impact the credit score?

Several factors decide  your credit scores and affect them in different ways.

Why is a good credit score so important?

• Seamless credit approval: Banks and lenders are inclined to approve your credit applications.
• Reduced interest rates: Those with good credit typically enjoy lower interest rates, leading to significant long-term savings.
• Enhanced loan terms: Benefit from higher credit card limits and secure a low fixed-rate mortgage.

Here's an example to illustrate the impact of credit scores on loan terms: Amit and Rohan both applied for a ₹1 crore housing loan for 15 years. Amit, with an excellent credit score, secured a loan at 8% per annum, while Rohan, with a fair credit score, received a loan at 9% per annum.

Simply by obtaining a loan at a 1% lower interest rate than Rohan, Amit managed to save ₹10.5 lakhs over the entire loan repayment period.

Do’s and don’t for a good credit score

• Ensure timely credit card payments: Credit card companies strictly enforce due dates. Missing even one payment can harm your credit score. On the flip side, consistently paying on time is crucial for managing your credit score.
• Pay more than the minimum: Paying only the minimum due can prolong clearing your credit card debt, as the interest charged on unpaid balances typically ranges from 2.5% to 3.5% per month.
• Reduce total debt: Aim to keep your credit utilisation below 30%. Cutting down on all debts, including credit cards and personal loans, is a swift way to enhance your credit score.
• Keep old credit card accounts open: Closing old credit cards, especially those open for over three years, can affect your credit age and lower your score by reducing your credit-to-debt ratio. Instead, consider cutting up or storing the card to avoid spending while keeping the account open.

Remember: Staying on track with your expenses and spending within your prescribed limits consistently is the key. Credit score improves gradually and takes around 4-12 months to finally reflect your improved credit score.

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