In the financial world today, a person with the ability to borrow money and with a healthy credit score is considered to be accomplished and successful. Most people who are financially inclined know about the need for a healthy credit score. Though everyone reviews their credit reports, there are very few people who understand this game or know the ways of improve CIBIL score.
Difference between Credit Score and Credit Report
There is a vast difference between credit score and credit report. Credit report is a file which contains the details of a person and his credit history. It consists of all the information about the person along with summarized account of his financial statements. The credit score is the CIBIL rating of a person which along with the cibil report is used by the lenders to decide whether it is safe to give a loan to a person or not. In the financial world, a higher credit score is considered to be beneficial. When a person applies for a loan, the lender uses the credit rating of the person to decide the amount that can be loaned and the rate of interest. Credit score is directly proportional to the loan amount and inversely proportional to the interest rate.
Factors that determine Credit Score
The five factors that are crucial in determining the credit score of a person are discussed below:
History of Payment – The payment history of a person i.e. whether he pays his bills on time determines 35% of a person’s CIBIL rating.
Amount Owed – A person should always try to use less than 30% of the credit that is available on his cards to keep his credit score healthy.
Term of Credit History – A person should try to start building on his credits as early as possible as this contributes to 15% of the credit score.
New Credit – This determines 10% of the credit score and includes the new accounts that has been opened by the person or the credit enquiries that he might have made.
Types of Credits – This includes all the loans and credits that are being used by a person like mortgage, car loans or credit cards. This determines 10% of the credit score.
A credit score of above 700 is considered to be healthy and lenders actually compete to get business from such people. On the other hand, people who have a credit score of 620 or less are considered to be risky by the lenders.
How a good Credit Score helps in saving Money
A person who has a good CIBIL rating can actually save lots of money when he borrows money. Discussed below are a few instances where a high credit score can help a person in saving money:
Low Interest Rates: A person who has a higher credit score is eligible for lower interest rates on the loans that he borrows. This hold true for all the loans be it car loan, home loan or credit cards. This helps the person to save money that he would otherwise have paid as interest.
Insurance: The insurance companies check the CIBIL ratings of a person before deciding whether to cover his home and car or not. A higher credit score also ensures that the person gets an insurance coverage at a lower premium.
Lower or no Deposits: Any person with a lower credit score would also get benefits from various companies as they would lower the deposits that they charge or even waive them off. These companies would also provide better plans to the customers who have a better credit score.
Thus having a higher CIBIL rating is always beneficial as it gives a person an upper hand in the financial world and helps him save money.