`When dealing with your finances, you might have come across commonplace advice on ‘maintaining a good credit score’ multiple times. But following up on any advice can only be urged when one knows the reason and importance of the same. Therefore, it is necessary to understand the reason why maintaining a good credit score is essential for credit card users. Put simply, a credit score helps the lenders decide if the person applying for credit is worthy of their approval or not. It helps them determine whether the applicant can pay back the credit extended to them or not.
Your credit score is calculated by the credit bureaus operating in your country by analyzing components like your payment history, exposure to credit etc. Your credit score can be rated somewhere between 300 to 900 and the closer it is to 900, the better. A good credit score also indicates a healthy financial habit on your part.
Why Should You Focus on Building Credit?
When it comes to finance, not a lot of people focus on building credit as a whole. However, it is important to do so because lenders usually check your credit score and credit history each time you apply for any credit related product or service like a loan or a credit card. This implies that the approval is only granted to applicants who do have a good credit score.
Not having a good credit score may lead to a low interest rate on mortgage, credit card or a loan. However, having a good credit score means that you do not have to struggle while applying for any of the above. It means that you present a clean image of your finances before a prospective lender or issuer, thus making it easy for them to consider you for credit.
Benefits of Having a Good Credit Score
- Eligibility for Approval of Loans – Getting an approval for loans can become easier when you have a credit score that is considered to be on the higher end of the scale. This is because a higher credit score implies that you repay your outstanding balances on time and therefore, are responsible in the dealing of your finances. The lender is thus assured that with no defaults to your history, you have a high chance of repaying your total due without fail. To be specific, your credit score should be above 750 to be considered a good one for approval of loans.
- Eligibility for Credit Cards – As with other credit products, credit cards too are mostly issued on the basis of your credit score. A higher credit score can help in easy approvals for credit cards providing better reward returns, perks and benefits. With a high credit score, you get a range of credit cards before you and can choose the one that best suits your needs.
- Higher Credit Limit for Credit Cards – When you have a high credit score, you and get higher credit in the sense that you can get a higher credit limit on your credit card and a higher loan amount approved. However, a low credit score can result in a lower credit limit or loan amount initially. This happens because your credit score is generally reflective of your repayment history and a higher credit score implies that you repay your dues on time.
- Low Interest Rate on Credit – Another benefit accrued to you when you have a higher credit score is a lower interest rate on loans offered by banks when you apply for them. If you have a clean repayment history, you are more likely to be offered credit at a lower rate of interest. This means savings for you in terms of personal loans, credit cards and mortgage.
- Benefits on Credit Card – An excellent or a good credit score holds the pass to you getting benefits and privileges on credit cards you own. This is because the credit card rewards, dining and lounge access benefits are available on credit cards that make sure that you have a high credit score and therefore, are creditworthy.
- Quick Approval for Credit – There are multiple lenders who provide you with pre-approved loans if you have a credit history with no defaults and a high credit score. This is one of the major benefits of maintaining a good credit score consistently. This comes of great use when you are in need of credit and your loan is approved without any wait time involved.
Building and maintaining a good credit score and credit history does not take up a lot of effort when you manage your finances in a responsible manner. It is much easier if you incorporate healthy financial habits into your routine and follow them consistently. Not only does this help you with your credit score, it also generally ensures that you get maximum benefits and rewards provided by your credit card.
In addition to this, it can be crucial in getting approval for financial assistance and credit like loans. If not at present, this can be useful in the future if you decide to purchase a car or a home for yourself, or even in times of health emergencies. Therefore, your credit score in a way secures your future financial decisions too. Start building your credit score as early as you can and reap the benefits accrued in the long term.