Buying a high-valued asset such as a home, car, or property usually requires individuals to take loans that shall be repaid within a fixed amount of time. However, the loan interest rate may vary from person to person, depending on their credit score.
What is a credit score?
A credit score is a number that ranges between 300-900 and is calculated by rating agencies like CIBIL on the basis of your financial situation. For example, if you have taken a loan or credit in the past from a financial institution like a bank, your repayment details and patterns are sent to the credit agencies by the banks on a monthly basis. After analyzing your repayment patterns, the credit agencies compile your credit history to determine your credit score. Repaying the loan amount along with the added interest on time increases your credit score, whereas payment defaults for late payments can bring your score down.
How can your credit score affect the loan interest rate?
While applying for a loan, the lender always makes sure to look at your credit score to evaluate your creditworthiness. A first-time homeowner credit score above 750 is likely to get good loan offers and reduced interest rates. Know about How To Qualify For First Time Home Buyer In Texas
On the other hand, if your credit score is low, the lender may decline your loan application. Home loans are usually high, which is why you should maintain the best credit score for a home loan which should be between 800-900 to get a loan at low interest rates.
Taking a look at your credit report allows banks to understand the risks involved in lending you money. Your credit report contains information about your previous loans and credit payments in a detailed format. If you have repaid all your past loans on time, you are categorized as a responsible borrower and can lower interest rates by the lender. Having a high credit score makes you eligible to avail of the loan easily as it is a numerical representation of your ability to repay the credit. Therefore, it is important to build a good credit profile and monitor your credit score from time to time.
How can you improve your credit score?
Since the credit code is a detailed summary of your current and past credit accounts and repayment buttons, you can get a brief idea about your credit status from it. Reviewing your credit report can give you a brief idea of where you are going wrong so that you can find out ways to improve and work on your credit score. Check out the below mentioned simple measures that can help you to improve your credit score:
- Late payments are the biggest factor that hampers your credit score. Therefore, you must pay your Credit card bills and other EMIs on time to boost your credit score.
- Utilize only 15-30% of your credit card limit as it suggests that you use it during emergencies and not all the time. Moreover, using a credit card to make payments more often implies that you are unable to handle your expenses and negatively impact your credit score.
- Take a look at your credit history repeatedly to check for any errors in your credit report. If you witness a sudden downfall in your credit score, you must check your credit report to find any errors and get them fixed as soon as possible.
Since the interest rate is one of the most important factors a borrower considers while requesting a loan, it is highly beneficial to maintain a decent credit score above 750 or closer to 900 to simplify the borrowing process.