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What is a credit score? And what is it meant for? How to improve it?

Updated: Nov 13, 2020

Info-graphics by Earn Honestly

This is a number that shows your credit history. Higher the number better the chance to get your loan approval. Generally, banks don't prefer a person with a low credit score.

A credit score shows your probability to default on your loan. Lower the score higher the probability.

Everyone begins without a credit score. Once there is data to analyze as if you took a loan, credit card etc. It takes about six months of credit activity to establish enough history for a FICO credit score, which is used in 90% of lending decisions.

This doesn't mean your credit score starts with zero.

Image credit: unsplash

Credit scores generally range from as low as 300 to the highest possible 850.

There are calculators available on the internet to calculate your credit score. You must repay your loan with interest within time to improve credit score.

Your bad credit history is saved on your credit profile for at least 7 years. This can put you on the defaulter's list which will ban you from taking a loan.

All banks check your credit score depending on their risk profile. If your credit score is low and the bank's risk profile is matched then you can get the loan but maybe with a higher interest rate.

To get the loan on your terms (interest rate and time period) you must have a good credit score.

Banks are usually ready to take a risk if you insure them to improve your credit profile. They are ready to take a risk because they have already done their calculation to recover that amount in case any person unable to pay.

Suppose the bank is giving a loan to 100 people and if 2 percent of people have a bad credit score and say that two will default on the loan. Banks ensure that profit from the remaining 98 people should compensate for loss from 2.

They also have tool that is your agreement terms to recover that amount any ways possible. Make sure you read them all carefully.

Steps to Improve Your Credit Scores

  1. Try to pay your bills on time.

  2. Don't keep credit card bill payment due for a long time. banks prefer a person who uses a credit card lot but does payment on time.

  3. If you have taken a loan, ensure to pay EMI on time

  4. Don't Close Unused Credit Cards.

Credit score indicator (Image source: Google)

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