New to credit? Reasons to build a strong credit score in 2021

With the new year 2021 just round the corner, it would be prudent to have a quick look at the numerous benefits of having a strong credit score, and take required steps to attain it.

The economic uncertainties and income disruptions during the pandemic have re-emphasized on the importance of maintaining financial discipline in our lives. While our financial fitness is indicated by some obvious factors such as savings, assets, current bank balance, investments and financial portfolio, a crucial facet which is often ignored is credit score.  For the uninitiated, credit score is a three digit numerical representation of your credit repayment behaviour creditworthiness, based on which lenders assess your creditworthiness. Those who have not availed any form of credit card or loan yet are termed as new to credit.

With the new year 2021 just round the corner, it would be prudent to have a quick look at the numerous benefits of having a strong credit score, and take required steps to attain it:

Lower interest rates and processing charges on loans

Many lenders  practice risk-based pricing to set lending rates for applicants. Since loan applicants with higher credit score reflect lower risk of credit default, lenders try to entice such applicants by extending lower interest rates to them. While in case of applicants with lower credit scores, lenders compensate for the higher credit risk involved by charging higher interest rate.

Additionally, some lenders have begun rewarding applicants with higher credit scores by either waiving off or reducing loan processing charges. Given that processing charges can constitute a substantial amount, especially in case of big-ticket loans, waiver or reduction of such charges can result in significantly pulling down the cost of credit for applicants. Such preferential treatment is highly unlikely for loan applicants with poor credit scores.

Higher loan eligibility

Credit score is one of the first filters factored in by lenders while evaluating your loan application. Generally, applicants with a credit score of 750 and above have higher chances of loan approval, since they are considered financially more disciplined, thereby reducing the risk of credit default. Whereas applicants with a lower credit score are considered as riskier prospects by lenders, which may make it challenging for them to get loan approval.

Gives access to pre-approved loan offers

Numerous lenders and online financial marketplaces put forward pre-approved loans and credit card offers based on your credit score. Such pre-approved loans or card offers may include benefits like low interest rates, better product features and quicker processing time. Also, these pre-approved offers can assist you in giving you a fair idea about your credit eligibility and cost of availing the credit, which might prove to be helpful in negotiating with other lenders for landing better loan and credit card deals.

Higher eligibility for balance transfer

Lenders often offer balance transfer options to the existing borrowers of other lenders, at lower rate of interest. Some lenders may even extend longer tenure option for the transferred loan, thereby resulting in lower EMIs for borrowers. However, similar to fresh loan applications, lenders evaluate credit score while extending balance transfer applications. Some lenders also consider your credit score while setting the interest rate of the transferred loan. Hence, building and maintaining a higher credit score would enhance your eligibility to avail loan balance transfers at lower interest cost and/or lower EMIs.

How to build credit score?

New to credit consumers can build their credit history by applying for credit card(s) and adopting disciplined usage and repayment behaviour of them. No interest is charged on credit card transactions (except for ATM withdrawals) by the card issuer, as long as the entire card bill is repaid by the due date.

However, not all credit card issuers issue credit cards to ‘new to credit’ consumers. Many applicants also fail to avail credit cards due to reasons like insufficient income, job profile, employers’ profile, unserviceable locations etc. Such consumers can avail secured credit cards to build credit history. These cards have similar features and benefits as their regular counterparts, except the fact that they are issued against the fixed deposit submitted as collateral. Just like regular credit cards, transactions made through secured cards are also reported to the credit bureaus. Adopting disciplined usage and repayment of these cards can therefore assist you in gradually building a strong credit score over the time.

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