If you and a colleague apply for a mortgage at the same bank, but find that they receive a lower interest rate while you’re charged a higher one, the primary culprit may be your credit score. Even if the loan amount is the same, a 1% increase in interest rate can result in a significant difference over the long term. So, what is a credit score? Why is it so important for loan interest rates? And how can you effectively improve your credit score to obtain more favorable loan terms?
What is a Credit Score?
A credit score is a three-digit number between 300 and 850 that reflects a person’s creditworthiness and borrowing risk. It takes into account factors such as a person’s repayment history, credit types, and debt ratio. A higher credit score indicates a safer borrower, and banks or lenders are more willing to lend at a lower interest rate. Conversely, a lower score indicates greater risk, and the loan interest rate will naturally be higher.
It is important to note that different credit rating agencies (such as CIBIL, Experian, Equifax, and CRIF Highmark) may assign slightly different scores. Therefore, interest rates vary depending on the credit report used by the bank.
How to Maintain Good Payment Habits?
The key to maintaining good credit is timely payments. Whether it’s a credit card bill, loan repayment (EMI), or a “buy now, pay later” service like Simpl or LazyPay, overdue payments can significantly lower your credit score. Delinquencies of more than 30 days will be recorded on your credit report and have a long-term impact on your score.
Recommended Practices:
- Enable automatic debits: Automatically debit your bank account to avoid forgetting to pay.
- Set payment reminders: If you don’t use automatic debits, you can use an alarm or phone reminder to ensure timely payments.
Control Credit Card Utilization to Avoid Excessive Debt
Credit card utilization refers to the percentage of available credit on your credit cards that is actually used. Ideally, this ratio should be kept below 30%. For example, if you have a total of 20,000 yuan on two cards, you should avoid cumulative overdrafts exceeding 6,000 yuan per month. Even if you pay your balances in full and on time, consistently high utilization can lower your credit score.
Practical Tips:
- Pay off your credit card balance promptly, especially near the billing date.
- You can make multiple payments to keep your balance below 30%.
- After 6 to 12 months of use, if your credit is good, you can apply for a credit limit increase.
Be cautious when applying for new credit cards and loans
Every time you apply for a new credit card or loan, the bank will conduct a “hard inquiry.” Frequent hard inquiries can lower your credit score and remain on your credit report for a longer period of time.
Smart Strategies:
- Assess Your Need: Confirm whether you truly need a new credit card; don’t blindly follow trends.
- Avoid Frequent Applications: Avoid applying for loans or credit cards frequently based on dealer recommendations or other factors.
- Cluster Applications: If you are applying for multiple loans, it’s best to apply within one to two weeks to avoid spreading them out.
- Pay Attention to Credit Inquiries: Checking your own credit report will not affect your score, but regularly checking your credit report is crucial to ensure accurate information.
Check your credit report regularly and correct any inaccuracies.
Errors in your credit report, such as misidentification of overdue payments or accounts being used illegally, can significantly impact your score. It’s recommended to check your credit report at least once a quarter. Use apps like Google Pay and Paytm, or visit the credit rating agency’s website for free.
If you discover inaccuracies, promptly file a dispute with the credit agency. These disputes are typically resolved within 30 days, and the corrected information will help restore your credit standing.
Your credit score is like a personal financial “health indicator,” influencing important financial service conditions like loan amounts and interest rates. Maintaining a high credit score requires consistent good behavior, such as paying bills on time, using credit wisely, applying carefully for loans, and regularly checking your credit report. With perseverance, a strong credit record will naturally follow.
