Everyday Money: Why Your Credit Score Matters Credit scores are used by banks and finance companies to determine whether or not to offer credit

Credit score has finally started getting due attention in India. This is because an individual's credit score is a key determiner of his likelihood to get big-ticket loans and the interest rate that will be charged on the loan.

Experian, CIBIL, CRIF and Equifax are the four credit bureaus in India that create credit score after examining credit report of individuals.

A credit report is a summary of your past financial transactions. It mainly contains details about your loan and credit card payment history and how much debt you have. Someone who has never taken a loan or does not have a credit card might end up with a low credit score as credit agencies will have nothing to base the score on.

Related Read: 4 Ways To Improve Your Credit Score

Here's why you need to maintain a healthy credit score:

Easy approval of loan application

Lenders use credit score to determine how likely you are to pay back loans. A low credit score indicates that you have not been diligent with loan or credit card repayments in the past and are likely to default in the future as well.

A low score makes you a risky borrower even if you have a good salary, no outstanding debt or enough collateral to support your loan application. With a low credit score chances are that the lender will not approve your loan application or slap you with a higher interest rate.

Credit score affects interest rate

Interest rate on loans and credit score are directly linked. For banks, applicant's credit score is one of the key factors to set the interest rate on the loan or credit card balance. The simple rule is that the better the credit score, the lower will be the interest outgo and vice-versa.

It would be prudent to check your credit score before applying for a loan. If it's less, you should take measures to improve your credit history in the next 6-8 months and then apply for the loan. A difference of 100 in your score can reduce your interest rate by 50-60 bps, which would translate into substantial savings over the loan tenure.

What is a good credit score

Source: Experian