Why is my credit score important?

Your 3 digit credit score determines whether you will get a loan, and if so, with what conditions. A credit score is usually one of the most important factors when banks/NBFCs decide whether to approve a loan application. A credit score gives them a good idea of the customer’s financial maturity and how safe or risky it is to do business with the customer.

 A low credit score reflects that the customer is not careful about repayments or has other credit-related problems. These are more likely to be high-risk customers and banks may not like to deal with them. Besides, a negative status reported viz. write-off, settled, days past due, etc. might prevent new loan approval.

A high credit score reflects a person who is financially responsible and has proven his/her ability to pay-off debts on time. Banks always want to minimize their risk, so they prefer to lend to a person with a higher credit score.

What is a credit score used for?

A credit score is used whenever a bank/NBFC makes a lending decision. Below are some of the situations where your credit score is an important factor:

 Credit card application: Credit card companies will look at your credit score to decide whether to approve your application.  A low score means you might not even qualify for a new credit card. A good score means that you might get much better terms: higher credit limits, better interest rates, additional perks and benefits on the card etc.

Tip: A good interest rate can have a long-term positive impact on reducing the size of your outstanding balance.

Auto loan: Your credit score influences your lender’s judgement on whether to lend you money to buy a vehicle. It will also influence how much and for how many months they are willing to lend you.

Housing loan: Your credit score is often the most important factor when lenders decide whether to approve of a housing loan. Though each lender has a different set of parameters for lending money, the credit score often takes precedence over the other factors for housing loans. Therefore, it is very important to have a good credit score when applying for a housing loan, or you are in danger of

being rejected outright.

Student loan – Very few students in India have a credit score which allows them to take a loan. Therefore, it is usually the parents who need to guarantee the education loans taken by their children. Thus the parents’ credit score is important if they decide to take a student loan for a child’s education.

Insurance: In more developed economies, insurers use credit scores to determine whether they will provide coverage for home and auto insurance. They also use these scores to decide how much coverage they will provide and the cost of the premiums.  If your score is high, the cost of your premium might be lowered. This is not yet a widespread practice in India but is likely to soon catch on. 

House rentals: In future, landlords may be able to see the renter’s credit score before deciding how much security deposit to ask for. Naturally, the higher the score, the lower the deposit required as the landlord feels comfortable that the renter will not default on payments. This situation is also not yet widely prevalent in India, but is likely to be so in the future.

What are the consequences of a low score when applying for a loan?

Depending on your score, lenders will decide on the interest rate, tenure and other conditions on the loan.

1.  If your score is low, you might not even qualify for a loan.2. If you are approved even with a low score, the lender might insist on higher interest rates and other unfavourable conditions in order to minimize the risk they are taking with your low credit score.

3. If you are rejected for a loan, each rejection will reduce your credit score even further.

Tip: Do not apply to multiple banks/NBFCs for a loan as any rejection will lower your credit score. Many people are not aware of this and apply to several banks to increase their chances of success.  Make sure you have a good credit score before you apply for a loan. Only apply where you are confident you are eligible for the loan.

What are the advantages of a high score?

A high credit score means that you will have faster access to credit and on much better terms.

1. With a good score, your loan application will be approved much more quickly.2. The bank will offer lower rates of interest since they are confident that you will repay on time.3. A good score might also result in a more favourable loan period.

Source : http://creditscoresindia.blogspot.in/2015/07/why-is-my-credit-score-important.html