Importance of Credit Score - Personal Loan Blog - Tata Capital

Why you Need to Build up a Good Credit Score for Future?

Mar 01, 2017

One of the things that are previous generations has advised us about is the importance of reputation. Importance of reputation and trust cannot be undermined. Infact, it takes years to build your reputation and days to destroy it. Isn't it?

Even if we talk about the financial world, reputation one has play s major role in how one is perceived by everybody else. Now no one will like to deal with someone who has a bad reputation when it comes to money. Isn't it?

And when it comes to finances, an individual's reputation is dependent on how he chooses to pay his debts. Does he pay on time or not? Does he take loans often or rarely? Has he ever been accused of defaulting on a loan completely?

And these are the questions that a credit report answers with the help of Credit Score.

A credit score is an indicator of your credit-worthiness and is calculated based on your financial history. So if your financial history is not that great, i.e. you are perceived to be a high-risk borrower, then your credit score will be lower.

A lender will not want to lend money to risky borrowers. After all, who wants to increase their chances of losing money? This is the reason that applicants who have low credit score are asked to pay higher loan interest rates, to compensate the lender for increased risk.

In unsecured loans like a personal loan, there are no collateral. So with no recourse to any security in case of failure to repay the loan, the lenders compensate themselves for higher default risk that they are taking by charging higher interest rate. And this seems justified.

For young borrowers, paying their small loans initially in their careers helps in building a good credit record. This improves the credit score. This helps in the long term when the applicants want to borrow large amount like housing loan.

So, if you have a loan currently, make sure that you are paying all your EMIs on time without default. It will help you improve your credit score.