A good credit score increases your chances of getting a loan or credit card approved, provided you fulfil the other eligibility criteria. However, the higher the credit score, the higher the negotiating power you have to get better terms from the bank.
These include a higher loan amount, a lower interest rate, higher tenure, a discount on or waiver of processing fees, etc. So, there are several advantages of a higher credit score. What are these advantages, and how can you benefit from them? Let us discuss.
You took the loan(s) and paid the EMIs on time. You hold credit card(s) and pay the monthly bills on time. Both these things helped you build and maintain a good credit score. A good credit score is a reflection of responsible credit behaviour in the past and credit worthiness for the future. Banks and NBFCs reward you for this responsible credit behaviour by sending you pre-approved offers for loans and credit cards.
A higher credit score makes you eligible for pre-approved offers for various loans and credit cards from various banks and NBFCs. Banks consider individuals with a higher credit score less risky, and hence send them pre-approved offers. As it is a pre-approved offer, once you avail it, the documentation and processing time is less.
In the earlier section, we saw how a high credit score makes you eligible for pre-approved loans and credit cards from banks. However, at times, you may want to apply for a credit card of choice from a bank or a loan from a bank of choice. When you make the application, the approval chances are higher if your credit score is high.
Banks consider a credit score of 750 or higher good for approving loans. However, apart from the credit score, the applicant has to fulfil other eligibility criteria. The higher the credit score above 750, the better the chances of the credit card or loan getting approved.
A good credit score demonstrates a history of timely loan EMI payments or credit card monthly bills, which is what banks and NBFCs want. Hence, applicants with a good credit score, who have neither delayed or defaulted on repayments, get preference for credit application approval over those with a lower credit score.
In the earlier section, we saw how a good credit score increases the loan or credit card approval chances. The benefits of a good credit score don’t stop there. It can help you get a higher loan amount or a higher credit limit on a credit card application.
If you have applied for a loan, a good credit score can help you get a loan of a longer duration. With a longer duration, the EMI amount is lower than a loan with a smaller duration. A lower EMI is easy on the pocket and helps in smooth loan repayment.
Some banks offer lower interest rates to individuals with a higher credit score. Depending on your credit score and relationship with the bank, you can negotiate the interest rate on the loan. Some banks offer a discount on the loan processing fee or waive it entirely for individuals with a higher credit score.
The extent of the reduction in the interest rate and lower/waiver of processing fees will depend on your negotiation skills. So, if you are applying for a loan and have a higher credit score, make the most of it by negotiating with the bank. Even a 0.25% small reduction in the interest rate on a big loan amount can reduce the monthly EMI amount by a decent amount. Over the long term, it will result in significant savings on the entire interest outgo throughout the loan tenure.
Many employers keep a tab on the financial behaviour of their employees. If you have applied for a job with any such employer, your higher credit score can give you an edge over the other job applicants, other things being the same. Even for existing employees, some employers monitor their financial situation. If the employee has delayed or defaulted on their credit obligations, the employer may ask the employee to take corrective action.
Now that you understand the advantages of a higher credit score, you must be thinking about how to increase/maintain the credit score. Here are a few suggestions to improve/maintain a higher credit score.
You should always pay your loan EMIs on time. The credit card monthly bill should be paid in full before or on time. Timely repayments help you improve or maintain a high credit score. Any loan EMI delays or defaults can hit your credit score hard. It may take longer for the credit score to recover.
For EMI repayments, opt for the auto-debit facility. You can do the same for credit card bill payments or set reminders a few days before the bill due date. If you are paying the bill through a third party, pay it a few days before the due date, as it may take a couple of days to process the payment.
The credit utilisation ratio measures the percentage of credit used from the total credit available. For example, Mahesh has a credit card with a limit of Rs. 1,20,000. He used the credit card for Rs. 24,000 in this month. Mahesh’s credit utilisation ratio will be 20%.
A credit utilisation ratio of 30% or lower contributes towards increasing your credit score. Hence, you should always try and maintain a credit utilisation ratio of 30% or lower. If it is high, either reduce the expenses on the credit card or ask the bank to increase your credit limit.
You should have a healthy credit mix of secured and unsecured loans. Secured loans include those that are backed by an asset. These include home loans, vehicle loans, gold loans, loans against securities like shares, MF units, etc. Unsecured loans include personal loans, credit cards, etc. Having a healthy credit mix of secured and unsecured loans helps in increasing or maintaining a good credit score.
When you apply for multiple loans or credit cards, make sure there is a sufficient time gap between two credit applications. Else, banks view it as credit-hungry behaviour. Also, for every credit application, the bank makes a hard inquiry to access your credit profile and score. Too many hard inquiries in quick succession will pull down your credit score.
If you have older credit cards, keep them active as they contribute towards improving your credit score. Similarly, a home loan of a longer tenure of 15 to 20 years does the same. The ageing of credit instruments like loans and credit cards positively impacts the credit score. The older the credit instrument, the better for your credit score.
We have discussed the ways of building and maintaining a good credit score. We have also discussed the advantages of a good credit score. Everyone should maintain a good credit score as it helps to access credit products like loans and credit cards. These credit products can help us during our bad times, like using credit cards for medical emergencies, and good times, like availing a personal loan to enjoy a family vacation.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
