Economic uncertainties and income disruptions during the pandemic have once again underscored the importance of maintaining financial discipline in our lives. While our financial health is indicated by some obvious factors such as savings, assets, current bank balance, investments, and financial portfolio, a crucial facet that is often overlooked is credit rating. For the uninitiated, the credit score is a three-digit numerical representation of the creditworthiness of your credit repayment behavior, on the basis of which lenders assess your creditworthiness. Those who have not yet used any form of credit card or loan are considered new to credit.

As the new year 2021 approaches, it would be prudent to take a quick look at the many benefits of having a good credit score and take the necessary steps to achieve it:

Reduced interest rates and processing fees on loans

Many lenders practice risk-based pricing to set loan rates for applicants. Since loan applicants with higher credit scores reflect a lower risk of credit default, lenders attempt to attract these applicants by giving them lower interest rates. While in the case of applicants with lower credit scores, lenders compensate for the higher credit risk involved by charging higher interest rates.

Additionally, some lenders have started to reward applicants with higher credit scores by waiving or reducing loan processing fees. Since the processing fee can be a substantial amount, especially in the case of large loans, waiving or reducing these fees can significantly lower the cost of credit for applicants. Such preferential treatment is highly unlikely for loan applicants with poor credit scores.

Higher loan eligibility

Credit score is one of the first filters lenders consider when assessing your loan application. Generally, applicants with a credit score of 750 and above are more likely to get loan approval because they are seen as more financially disciplined, thus reducing the risk of credit default. While applicants with lower credit scores are seen as riskier prospects by lenders, which can make it difficult for them to get loan approval.

Provides access to pre-approved loan offers

Many lenders and online financial marketplaces offer pre-approved loans and credit card deals based on your credit score. These pre-approved loans or card offers can include benefits such as lower interest rates, better product features, and faster processing time. In addition, these pre-approved offers can help give you a fair idea of ​​your credit eligibility and the cost of using the credit, which can be helpful in negotiating with other lenders for better deals. loan and credit card.

Higher eligibility for balance transfer

Lenders often offer balance transfer options to existing borrowers from other lenders, at a lower interest rate. Some lenders may even extend the tenancy option of the transferred loan, resulting in lower EMIs for borrowers. However, as with new loan applications, lenders assess the credit score while extending balance transfer requests. Some lenders also take your credit score into account when setting the interest rate for the transferred loan. Therefore, establishing and maintaining a higher credit score would improve your eligibility for loan balance transfers at a lower interest cost and / or lower IMEs.

How To Build A Credit Score?

New credit consumers can build their credit history by applying for credit card (s) and adopting disciplined behavior in using and reimbursing them. No interest is charged on credit card transactions (except ATM withdrawals) by the card issuer, provided that the entire card bill is repaid by the due date. deadline.

However, not all credit card issuers issue credit cards to “new to credit” consumers. Many applicants also fail to avail credit cards due to reasons like insufficient income, job profile, employer profile, unusable locations, etc. These consumers can use secured credit cards to establish a credit history. These cards have similar features and benefits to their regular counterparts, except that they are issued against the fixed deposit presented as collateral. Just like regular credit cards, transactions made through secure cards are also reported to credit bureaus. Adopting disciplined use and repayment of these cards can therefore help you gradually build a strong credit rating over time.

(By Radhika Binani, Product Manager, Paisabazaar.com)