Credit Scores: An Important And Often Overlooked Aspect of Financial Planning

When it comes to financial planning, investment management often commands all the attention, while the vital role of debt management quietly takes a backseat. However, this oversight can significantly impact your financial journey. It’s important to remember that while investments and savings drive the timely achievement of financial goals, effective debt management is essential for safeguarding your financial health and ensuring sustainable wealth creation in the long run.

Holistic financial planning requires a prudent debt management strategy, and credit score is a critical parameter that indirectly reflects the success of that strategy.

What is a Credit Score?

A credit score is a three-digit numerical representation of your past credit behaviour published by Credit Information Bureaus (CIB). In India, the RBI authorises four entities to function as CIBs. TransUnion CIBIL Limited, which publishes CIBIL scores, is one of them and by far the most popular; that is why it is also synonymous with credit scores. The other three are Equifax, Experian and CRIF High Mark.

Each CIB applies its proprietary algorithm to determine your credit score based on factors including your past repayment habits, credit utilisation, and duration of your credit history.

In India, credit scores range from 300 to 900, with higher scores reflecting stronger creditworthiness. A score above 750 is generally considered good, indicating disciplined financial behaviour and improving access to favourable credit terms.

How do credit scores impact our lives?

Credit scores are like ‘badges of integrity’ for the borrowers; here are ways credit scores impact lives:

• Banks and financial institutions scrutinise credit scores before approving loans and deciding on applicable interest rates. A higher credit score enhances loan approval chances and helps negotiate lower rates.

• A high score opens doors to other beneficial credit products, such as credit cards, where you gain access to premium cards with exclusive offers, higher limits, and rewards.

• A robust credit score reflects reliable financial behaviour that boosts your credibility among lenders and even potential employers.

• It keeps you accountable for your borrowings, securing your financial life.

How can we make this score favourable?

These are routes to improve and sustain a healthy credit score:

Pay on Time: Always ensure your EMIs and credit card payments are on time and in full.

Utilise Credit Efficiently: Don’t maximise the use of credit limits; keep it around 30% of the total limit.

Avoid frequent and multiple loan applications: Every loan application is considered a hard enquiry and may lower your score.

Examine Your Credit Report: Periodically check the credit reports provided by CIBs for errors and immediately inform them of any inaccuracies.

Build a positive credit history: Use credit responsibly to create a favourable history.

While advances in fin-tech have eased many processes, they have also opened doors for novel frauds, such as scammers stealing other people’s identities to borrow. You may follow prudent debt management, assuming that your actions will result in a high credit score, and they should. Nevertheless, make sure to check your credit report regularly and be assured that there is no identity theft and no loans listed that you didn’t take.

A good credit score is a vital and valuable asset to maintain, ensuring seamless access to credit—an indispensable tool for achieving financial goals. More than just a number, a strong credit score serves as the cornerstone of financial freedom and stability. By actively managing and protecting it, you empower yourself to realize your financial aspirations and secure a brighter future.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature