Here’s what you need to know about what a credit score is and why maintaining a good credit score is important.

What is a credit score?

Credit scoring is the term used to describe formal statistical methods used for classifying applicants for their creditworthiness – determines the probability of default or delinquency of loan applicants. They are typically expressed in a numeric format that indicates how likely a consumer is to make their repayments on time and in full along with added fees and charges. Scores can be scaled to any numerical range, the higher the credit score of the borrower the lower the risk of credit default. 

Credit scoring models usually assess several parameters such as repayment history, outstanding loans, loan durations, credit mix, the ratio of debt to income, etc. Therefore, it is critical to be aware of how to manage and shape your credit score.

What is a good credit score?

Credit score ranges vary depending on the credit scoring model, it is usually a three-digit number between 300 to 900. 

Generally, credit score ranges:

• From 580 to 669 are considered fair
• From 670 to 739 are considered good
• From 740 to 799 are considered very good
• From 800 and up are considered “exceptional”

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A person with a lower credit score will be considered a high risk of default, therefore, lenders will either reject their loan request or grant them loans with a higher interest rate. Therefore, a healthy credit score is required to enjoy a hassle-free credit experience, whereas a low credit score can lead to difficulties in securing a loan.

Tips for a better credit score:

A good credit score can be achieved over time based on good financial discipline and credit behavior.  

Here are some tips for earning a better credit score:

• Only opt for loans that can be managed: There are many quick and easy loan options, therefore, it is wise to take credit on only necessary items within your repayment capacity.
• Avoid delinquencies: It is essential not to miss scheduled payments as your credit behavior plays a crucial role in determining your financial health as each late payment leaves a footprint on your credit score.  Avoid late payments, defaults, short payments, etc. at all costs.  Keep track of your monthly bills by creating a filing system, setting due date alarms, automating bill payments, etc.  
• Credit Utilization Ratio: The Credit Utilization Ratio is the ratio of your available credit to your credit spending.  This is the second most important element after credit history. Maintaining a low ratio will earn you more points in your credit history. Pay down your revolving credit as much as possible to lower your credit utilization ratio.  The ideal rate is to keep your Credit Utilization to 30% or less.  
• Keep your old accounts open:  A long credit lifecycle can have a positive impact on your credit score, indicating to lenders that you have a good credit management ability. 
• Do not apply for multiple loans at the same time:  Balance between unsecured loans and secured loans plays a crucial role in your credit score.  Focus on having more secured loans.  
• Review your credit report regularly: It will give you a sense of your credit consumption and keep your credit behavior in control.  Also, may help you notice inaccuracies and have them removed on a timely basis. 

Bottom line, a credit score is the key deciding factor for lenders and financial institutions to assess your creditworthiness. Therefore, do not wait until you apply for a loan to have good credit as it takes time to build and improve.  It can take several months to see a noticeable change in your score when you start taking steps to turn it around.  It is important to have the good financial discipline and keep in mind the above tips in maintaining a good credit history.  

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