As kids, many of us had piggy banks gifted to us by our parents. These small and attractive jars with a small slit to insert money were a lot more than a gift. For many of us, these piggy banks were our first prudent financial practice; we learnt how to save and spend cautiously. Good financial habits have a massive impact on our financial health and status as adults. Financial practices affect our lifestyles and impact our ability to achieve our aspirations and goals.

One of the most reliable indicators of financial health is the credit score. If you have applied for a loan recently, you may be familiar with the term credit score. Also known as the CIBIL score, a credit score is a three-digit number which indicates your financial health and ability to repay borrowed money. This score ranges between 300-900, with a higher score being more beneficial to the borrower. A score closer to 900 assures better access to loans and credit cards as it displays that the borrower will responsibly pay back the loan acquired from the lender.

It is possible to understand if your credit score is good or bad based on this

Above 750 – This is an excellent credit score.
700–750: A credit score in this range is very good.
650-700: A number in this range is also a good credit score.
600-650: If your credit score is in this range, it will have an adverse effect while seeking a loan
Below 600: If your credit score is in this range, you may not be able to get a loan.

It is essential to understand how rating agencies calculate your credit score and the practices that can impact your score. Several data points contribute to calculating every individual’s credit score. Some of these include credit history, the number of outstanding loans, and credit card payment history. Simple practices such as paying your credit card bills and EMIs on time can influence your credit score. Credit information companies such as TransUnion CIBIL Limited source and compile this information from banks and other financial institutions into a Credit Information Report, leading to the credit score.

When you apply for a loan, this credit score can profoundly influence your eligibility. At the first step, your loan eligibility is evaluated using your credit score, income and current EMIs. If your credit score is higher, your chances of acquiring a loan are better. Apart from getting a loan, there are several advantages to having a high credit score. People with good credit scores can negotiate better interest rates, get credit cards with higher credit limits and beneficial offers, avail discounts on loan processing fees, apply for loans with longer tenures, and apply for pre-approved loans. Above all, a good credit score empowers you with negotiating power and lets you choose from several options while taking a loan. As you work towards your aspirations of buying a new home or setting up a business, there many ways in which you can improve your credit score. At the same time, these practices also help you manage your finances better and improve your financial health.

Clearing credit card and EMI dues – Along with clearing pending dues, always keep a tab on your expenses and pay the bills on time. Avoid using too many credit cards. Pay all EMIs before the due date as delayed payment will affect your credit score negatively.

Make proper use of credit cards – Instead of closing credit cards, it is better to pay your dues on time and maintain a reasonable credit limit. You should keep your credit utilisation ratio of a credit card between 30-40 per cent.

Avoid applying for multiple loans – Applying for multiple loans at the same time from various sources can affect your credit score and prospects of getting a loan adversely. Maintain a mix of secured and unsecured loans as multiple unsecured loans may affect your credit score negatively.

Loans provide a great stepping stone toward achieving our dreams. Consciously maintaining a good credit score is a great habit to teach to make these dreams without any financial hurdles.

Understanding Credit Score and its Role in Loan Eligibility

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