Credit Score Cycle: How to build and maintain a strong credit history | Mint
Source: Live Mint
A credit score is a three digit number. It typically ranges from 300 to 850. A figure between these two digits predicts an individual’s creditworthiness and summarizes his or her credit history.
Lenders use this score to analyze the risk of lending a borrower with funds. A higher score indicates a lower risk and increases one’s chances of loan approval with lower interest rates and favorable terms. Therefore, understanding how credit scores are calculated can help a borrower in building and maintaining a good credit history.
What are the factors that influence credit score?
Several factors join in to influence an individual’s credit score. Payment history and amount owned being the most significant. Now payment history accounts for about 35% of one’s FICO score and reflects whether an individual pays his or her bill on time.
It is crucial to note that consistent, on-time payments demonstrate that an individual is a reliable borrower. The total amount a borrower owes contributes to about 30% of one’s score. Considering factors like the credit utilization ratio and number of accounts with balances.
It is important to keep the credit utilization low, ideally below 30% shows that the borrower is not exceeding his or her limits of borrowing.
Importance of the length of credit history
The length of a loan applicant’s credit history, new credit and credit mix also play a crucial role, though to a lesser extent. A longer credit history can be beneficial, while opening too many new accounts in a very short span of time may lower one’s score. Therefore, having a mix of credit accounts i.e., credit cards, loans etc., can also influence the credit score of an individual positively.
Understanding the cycle of good credit
Hence, a credit cycle is nothing but the overall personality of a borrower along his or her past credit performance. Every single detail matters. Past defaults, performance and repayment patterns are important in providing lenders crucial information based on which future lending decisions can be taken.
Building good credit involves several key practices. Always paying bills on time, keeping the credit utilization low along with avoiding opening too many new credit accounts at once are minor things that are required to be kept in mind. Regular monitoring of credit reports for errors and acknowledging them properly is also equally important.
Maintaining good credit history and reputation unlocks numerous financial benefits. It increases the chances of being approved for loans and credit cards in the future with better interest rate and terms.
This can save a borrower money on interest payments over time. Good credit can also make it easier to rent an apartment, avail insurance and even secure employment in leading multinational companies in the country.
All this is possible as credit is directly associated with an individual’s integrity. Therefore, by understanding and managing the factors that influence the credit score, one can easily establish a cycle of good credit that supports your financial goals.
