Financial stability is very important today, and credit score is an important part of it. If you want to make your financial journey smooth, then your credit score should be strong. But, many people are unaware of the concept of credit score or face difficulty in understanding it. Today we will talk about what is credit score, how it is created, and how you can maintain and improve your credit score.
What is Credit Score?
Credit score is a three-digit number that represents your creditworthiness. That is, looking at your financial history tells how well you can fulfill your financial responsibilities in the future. Credit score generally ranges from 300 to 850. The higher the score, the more trustworthy you are considered in the eyes of lenders.
How is Credit Score calculated?
Many factors are kept in mind to calculate the credit score. Here are some important factors:
Payment History (35%): Do you pay your bills on time? This is the most important factor. If you have ever made a late payment or defaulted on a bill, it has a negative impact on your credit score.
Credit Utilization (30%): What percentage of your available credit you are using also matters. If you overuse your credit limit, it is a negative signal.
Length of Credit History (15%): How long your credit history is also affects the score. Borrowers with long history are considered more trustworthy.
Types of Credit (10%): What types of credit accounts you have, such as credit cards, loans, mortgages, etc. Having a more diversified portfolio can improve the score.
Recent Credit Inquiries (10%): If you have applied for many new credit accounts recently, this can also have a negative impact on your score.
Tips to Build a Strong Credit Score
Now that you know how credit score is calculated, let’s talk about some tips that will help you strengthen your credit score.
Pay Bills on Time: Always pay all your bills, whether they are credit card, loan, or any other bill, on time. Late payments directly impact your score.
Keep Credit Utilization Ratio Low: Keep your credit utilization below 30%. If you have a credit limit of ₹1,00,000, try not to use more than ₹30,000.
Do not close old credit accounts: Many people close their old credit accounts when their balance becomes zero. But old credit history strengthens your score, so keep the accounts open.
Be cautious in opening new credit accounts: If you frequently apply for new credit cards or loans, it can negatively affect your score. Only think about opening new accounts when necessary.
Keep checking your credit report: It is important to check your credit report at regular intervals. Sometimes mistakes can also lower your credit score, which you can resolve by arguing.
Importance of Credit Score
Credit score is not just a number; it is a reflection of your financial health. A good credit score can get you loans at low interest rates, higher credit limits, and many financial benefits. When your score is high, lenders consider you reliable, which helps you in future financial needs.
Basic Steps to Build a Credit Score
If you are new to the credit world, you can build your credit score by following these basic steps:
Start by getting a credit card: The first step is to get a credit card. You can also get a secured credit card, which is helpful in building an initial credit history.
Pay off by making small purchases: Use a little credit first, like small purchases, and pay them off on time. This will make your payment history strong.
Consider a Credit Builder Loan: Many financial institutions offer credit builder loans that are specially designed to build a credit score.
Conclusion
A strong credit score can open doors for you in the financial world. Whether you need a loan, want to finance a new car, or are dreaming of a new house, your credit score will help you in everything. By following these simple steps, you can improve your credit score and take one more step towards financial freedom.
Take care of your financial health and use your credit score as a powerful tool to achieve your future goals!
