The Untold Secret to How is Credit Score Used?

What is credit score used for? - In simple terms, Credit Score is an important factor in determining whether a person is eligible to get a credit. Credit Score refers to the ability of a person as to how efficiently he services his loans or debts. It is a measure of credit worthiness of any person.

How is Credit Score used by a Lender? - In current scenario, lenders consider credit score as a major factor in deciding whether a loan can be extended to a person.

There are following entities which make use of Credit Score during there decision making process:

(1) Self

You can use your Credit Score to know your ability to pay off your debts. If your credit score is over 750 then it shows that you have been quite regular in paying your debts/ loans in time and have not defaulted. This credit score will also inform you as to whether you can easily get a loan. If you have a good credit score then you can avail the loan at lower interest rates and on favourable terms and conditions.

RBI has directed each credit bureau to provide a free Credit Report every year to any person. You must get yourself updated with your latest credit score by availing this free facility.

(2) Banks, Creditors & Lenders

Credit Score is very important in determining your eligibility to avail loan, especially Home Loans which are long term loans ranging from 20 years to 30 years. Whenever you want to avail a loan, the lender checks your Credit Score along with other things such as your income, your employer's details, your mortgages, etc. before approving your loan. Credit Score implies to financial health of a person. It is very significant factor during loan approval process by the bank and further, it is readily available.

(3) Employer

Employer can also use Credit Score in order to assess the credit history and financial health of a person. This score is mainly required by the employers of banking and financial industry and is used to know whether a job applicant is eligible to get that job. A good credit score eliminates the possibilities of rejections.

(4) Landlord

If you want a house on rent, the landlord may check your Credit Score in order to see whether you have made regular payments of your dues, if you have defaulted, how much credit you have availed, etc. The landlord will also be able to make a fair assessment of the security deposit to be taken from you, in case he gives the house on rent to you. Your crdit score will be an influencing factor in deciding whether he should let you take his house on rent or not.

(5) Credit Card Companies

Credit card companies basically rely on credit scores to assess the creditworthiness of their customers. A higher credit score indicates a history of responsible borrowing and timely repayments which indicates that the applicant has a low-risk profile. Therefore, individuals with high credit scores are more likely to be offered credit cards with favorable terms for example lower interest rates, higher credit limits, attractive rewards, etc.

In the same manner, applicants with lower credit scores are offered higher interest rates, lower credit limits or even their applications get rejected. Credit card companies also use credit scores to manage existing accounts by periodically reviewing customers' credit scores to determine eligibility for credit limit increases or to identify potential risks. This lets credit card companies minimize risk and maintain profitability.

(6) Insurance Companies

Insurance companies utilize credit scores as a predictive tool to determine the likelihood of policyholders filing claims. It has been observed that individuals having lower credit scores file more claims. As a result, insurance companies use credit scores to set premium rates and decide the other important terms.

A higher credit score results in lower premiums as the insurers believe that the policyholder has a lower risk profile. Lower credit score applicants will have to pay higher premiums. Insurance companies can more accurately set the premiums of their products by taking credit scores of the aplicants into consideration while calculating premiums.

(7) Government Agencies

Government programs that offer financial benefits to the people such as housing subsidies or small business loans consider credit scores to evaluate the eligibility and risk profile of applicants to confirm that the resources are allocated efficiently.

Upcoming Bank Holidays

Find More Useful Links