Credit rating is one of the significant factors in several financial activities when applying for mortgages, loans, and credit cards. Credit ratings display your creditworthiness to lenders, and you must have a positive rating. Your credit rating influences your loan and its interest, along with the amount of loan you may get.
Therefore, it’s necessary to know all about the importance of your credit rating if you want to secure a loan in the future. At the same time, you must also ensure that you check CIBIL score as frequently as possible.
Why are Credit Ratings Important?
Any financial advisor will ask you to check CIBIL score or rating. Credit ratings are crucial and give banks and financial institutions a ground for assessing whether you can return your loan. Further, you are a low-risk borrower if you have a high credit rating while also getting a reduced interest rate on any loan. At the same time, you are a high-risk borrower if you have a low rating with a considerable loan interest. Thus, credit ratings are essential for the following reasons:
- You have a higher chance of getting your loan, and the lender is more likely to get their money back if you have a positive credit rating.
- The ratings also make it easy for lenders to analyse the risk of lending you money.
- Further, credit ratings affect the interest rate you will pay on a loan.
- If you have a high credit rating, you will get a better interest rate, making a difference in a loan’s total cost over time.
How is the Credit Rating Determined?
The credit rating is determined through several factors, including the following:
- Credit Use
One of the elements determining your credit rating is your credit utilization rate. Your credit utilization rate signifies the credit that you use at a specific time. And it’s always better to use below 30% of your credit. Such behavior displays that you do not max out on your credit cards and will not default on your debt to the lenders.
- Payment History
Your payment history is one of the primary aspects determining your credit rating. Your financial history tells the lenders that you can make your loan payments on time and be trusted with the loan. Hence, you are more likely to get a loan with a positive credit rating.
- Inquiries
A part of your credit rating is influenced by the number of queries you make for new credit. The higher your queries, the more the lenders realise that you are in financial distress and may be looking for more money than you can repay. Such an aspect will hurt your credit rating.
- Types of Credit
When you want to increase your credit rating, having a mixture of different kinds of debt is better. Having only one kind of loan will make it challenging to boost your credit rating. At the same time, a diverse debt mix will show that you can manage several kinds of payments simultaneously.
- Length of the Credit History
A long credit history insinuates a better credit rating and displays to the lenders that you have been responsibly managing your debt for a considerable time. It makes them more likely to give you another loan when they know they can trust you to repay it on time.
- Outstanding Loan Amount
Although several things could boost your credit rating, some factors could negatively affect your rating. One of these factors is your outstanding loan amount, which will display your inability to pay off your dues. With such an evaluation, any creditor is less likely to give you any loan unless you can pay off your dues on time for a long period.
Conclusion
Credit ratings are crucial since they can be the make-or-break factor when you need a loan. A CIBIL score app or website will help you track your ratings. Every lender checks your credit rating to assess whether you should be given a loan and whether they can trust you to return the loan on time. Your credit rating helps lenders decide whether they should lend you any money. In return, you can make informed decisions on borrowing money.
In this case, you must check CIBIL score for free through the CIBIL score app, making it convenient for you to evaluate and improve your rating with time. You can improve before you apply for any kind of loan. With a positive credit rating, you can get a loan with favourable interest rates and terms.
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