Credit score which is often a neglected concept during financial planning comes into play when you are in need of funds and the institution that you approach weighs the factor substantially while processing your loan application. For the laymen, it is a 3-digit score that decides the financial creditworthiness of the individual to make future re-payments basis the previous credit behavior. In simple words, the credit score thus decides your ability to borrow funds from the financial institution.
How to build a high credit score?
Notably, the credit score has a range from 300 to 900 points, of which a score of 300 is on the lower end while that between 681-730 points is considered as good and points obtained over 730 reflect an excellent credit score. And for building a high credit score, you need to be showing good credit behavior which can be summarized in the below points:
1. Paying credit card bills and other EMI (equated monthly installment) dues against any of the loan on a timely basis and in full.
2. Expenditure done using the credit card should be limited to maximum 40% of the credit limit. Utilisation of 30% of your available credit is considered to be ideal as both over and under-spending impacts the credit score negatively.
3. Also, refrain from applying for loan at multiple lenders within a short time span
4. As far as possible try and service the outstanding payments against your credit card well before the due date
5. In case your credit score improves at a certain point in time, you may get the offer of enhanced credit limit from the lender which also eventually helps in building a high credit score.
Now the question comes up- How high or good credit score helps save money?
Lower interest rates: When it comes to borrowing funds, some of the lenders now offer differential interest rates depending on the loan applicants' profile basis which the risk measure associated with the borrower is adjudged. So, while a person with a high credit score has an increased chance of getting the loan application processed, he may as well succeed in securing a competitive rate of interest in comparison to other applicants with poor credit score.
Loan balance transfer: Also when you opt to make a loan balance transfer application to a new lender, the institution does a thorough check in respect of your credit report and other factors such as monthly income source, employer etc. And in case you had shown a good and responsible credit behavior with the past borrowings, the transfer application to the new lender who is offering credit at a lower rate of interest is most likely to get approved. Thus you will be able to save significantly especially in case of big-ticket loans such as housing loan which span a longer tenure.
Processing fees and other charges waived: In some of the instances, though rare, financial institutions reward an individual for maintaining a high credit score by waiving off some of the charges such as processing fee and other charges that usually apply in case of processing of loan application. This is especially true in case of big-ticket loans, which upon negotiation can see complete waiver of such fee or partial charges being charged against the head.
Other benefits such as rewards associated with better credit cards: Also, high credit score makes you eligible for better and improved credit cards that provide higher rewards against your spends with benefits such as air miles or reward points, discounts, cashback etc. And for maximum gains or savings, go for the credit card that offers rewards in line with your lifestyle.