Credit bureaus assess credit scores by examining how you manage your credit card and loan payments, as reported by lenders and credit card companies. In the absence of adequate information regarding your credit history, credit bureaus are unable to generate a credit score for you.
Here are five reasons why you must work towards having a good credit score:
1. Higher loan eligibility
Lenders access credit reports of the loan applicants to evaluate their creditworthiness. Those having a good credit score, i.e. scores of 750 and above, are considered to be financially disciplined and thus, carry a lower credit risk for the lenders. Hence, applicants having higher credit scores have better chances of getting their loan application approved, vis-à-vis those having a relatively-lower credit score.
2. Lower interest rate on loans
As a part of risk-based pricing strategy, many lenders have started factoring in the credit scores of loan applicants while setting the interest rate. They try to attract applicants with higher credit scores by offering loans at preferential interest rates. On the contrary, lenders try to compensate for higher credit risk involved in lending to those with lower credit scores by levying a higher interest rate.
As the risk-based pricing strategy can differ widely across lenders, loan applicants should compare the interest rates offered by as many lenders as possible before making the final choice. The best way to do so is to visit online financial marketplaces and compare loan offers from multiple lenders based on one’s credit score, job profile, monthly income, etc.
3. Lower processing fee on loans
Just as in the case of interest rate, some lenders have started rewarding loan applicants with a higher credit score by either reducing or waiving off their processing fee. As the processing fee of loans can go up to a sizable amount, particularly in case of big ticket loans, a reduction or waiver of such fees can lead to a considerable reduction in the overall credit cost.
4. Higher chances of availing credit card and enhanced credit card limit
Accessing instant credit is no longer the only reason for availing a credit card. It also offers numerous benefits in the form of attractive cash backs, reward point programs, air miles, no-cost EMI options, discounts, vouchers, etc on credit card transactions. However, similar to loans, credit card issuers also factor in the applicant’s credit score before approving their credit application. Thus, those having a strong credit score have higher credit card approval chances.
Having a good credit score can also help in getting the credit limit enhanced from the card issuer. An enhanced credit limit will increase your spending power and thus, boost your capacity to conduct big ticket transactions or meet financial emergencies.
5. Improved accessibility to credit card offers and pre-approved loans
Lenders and online financial platforms often extend pre-approved loan and credit card offers to those having higher credit scores. These offers usually come with better product features, quick disbursal time and lower interest rates and fees. These offers will provide a rough idea about your eligibility for a loan or credit card, and the cost involved in availing the credit. Such offers can help you negotiate with other lenders for securing a better loan deal.
