What does it mean to have a good credit score and does a good credit rating translate into some actual benefits for you? Credit rating is a statistical tool that gives a score ranging from 300 to 900 to an individual. A score of 700 and above is considered good; obviously the higher it is the better it is for the person whose being scored. A high score could entitle you to certain benefits and you could get some preferential treatment. Here is the reason why banks are willing to offer benefits to those who have a high score.
Why do banks offer benefits for a good credit score?
Credit score are tools that aid the decision making process for the lender. Banks do not accept all loan applications that come to them. They want to provide loans only to those applicants who they feel can be trusted and our capable of returning what they borrow. For this they have a list of eligibility criteria that the applicant must comply to; apart from that they also consider the CIBIL score of the applicant.
The CIBIL score provides them a statistical and objective assessment of the creditworthiness of the applicant. A look at the credit report tells the bank about your credit history and how regular or irregular you have been in the past in repaying your dues. This lets them take an educated guess on the likelihood of you defaulting or not in your future borrowings. The CIBIL report also lets the lender get a fair idea about your overall debt obligation and how leveraged you are. If you already have a lot of running loans then the bank may not want to lend you more as you may find it difficult to repay the dues in a timely and regular manner. The report also contains information about any loans or credit card dues that may have been settled in the past or if there are any other remarks on your past borrowings.
The credit score also gives a risk assessment of the borrower. Looking at the rating the borrower can assess the risk profile of the applicant, since it is an objective assessment there is no room for bias or subjectivity. So a low CIBIL score means that the applicant is a high risk borrower and the converse is true for a high CIBIL score.
Lenders charge interest on the funds lent for the use of funds and as well for the risk of default by the borrower (which they undertake) when they sanction a loan. A high score means less risk which may prompt the banks to offer concessions to the borrower like lower interest rate on the loan, faster processing of loans (lesser time take in due diligence) and waiver of certain fees. Thus a good sore makes you an attractive and creditworthy customer for the lender, they reward this by offering you benefits. A high rating also gives you more choice in terms of which lender to approach, thus you can approach the one who offers the most lucrative terms and conditions for the loan.
Benefits of a Good Score:
If you do not have a high score then it does not mean that you will not get a loan or a card. Depending on the score you could get a loan but maybe at more stringent terms or you may be able to borrow at higher rates from only certain lenders. A very low score would certainly mean that you cannot get a loan sanctioned from the organized sector. Here we take a brief look at the benefits of a good score:
Lower interest rates: This by far could be the biggest benefit that you can get due to a good score. Lenders may offer by loan at concessional rates to those who have a good score. Even if the rate is lowered by half a percent then it could translate into huge savings especially in the case of a home loan which runs for long periods and usually run in lakhs.
Faster sanction of loans: Banks have to carry out various checks and verification procedures before they sanction a loan. A low score could mean additional check and a more detailed scrutiny. A good score eliminates the need to do so and the lender is willing to sanction a loan with minimal delay.
Fee waivers: This is something which will depend on a good score and also the negotiating power of the borrower. So if you have a good score you can negotiate the waiver of fees like the processing fee, legal fee etc.
So make sure to be a responsible borrower as a good score not only makes it possible for you to get a loan but it also entitles to various benefits.