Everyone aspires to be financially independent. Financial independence means different things for different people. For some, it’s having sufficient savings, investments and cash on hand, while for others, it is to live a debt-free life.
Yet, financial independence remains an elusive goal for many. Increasing debts, reckless spending, financial emergencies and unexpected events make it difficult to attain financial freedom. Take the example of the recent Covid-19 pandemic. None of us could have predicted such a life-changing event. Dwindling salaries, job losses, dipping into savings – the current pandemic overturned plans and put undue stress on our financial lives.
Financial troubles can happen to anyone. But the smart ones make the right plans to overcome these troubles and reset their financial goals back on track. In this post, we discuss why your credit score plays a crucial role in helping you achieve financial independence and ways to improve your credit score.
What is a credit score and why should I consider it?
Not many people are aware of their credit score – let alone how it impacts their financial life. People realise the importance of a credit score only when it is time to take a loan to buy a home or a car or for any other major purchase.
A credit score is a three-digit number, which lenders use to evaluate the creditworthiness of a borrower. The number presents a clear picture to the lender of whether you are a risky borrower or not. The lender decides to sanction a home loan, car loan, or credit card to the borrower based on their credit score. The credit score also determines the loan amount/credit limit and the interest rate on it.
All individuals have their own credit scores. When you get married, you and your spouse have an individual credit score, which is scrutinised when you jointly apply for a home loan. The lower your credit score, the riskier you appear to the borrower. This costs you in the long run.
Individuals with low credit scores find it challenging to qualify for loans, and even if they are approved, the loans cost them more due to steep interest rates and other non-favourable terms and conditions.
Credit scores range from 300 to 900, and the closer your score is to 900, the better it is for your financial future. When you have a high credit score (above 750), you get better access to credit and the best rates on your loans and credit cards.
Now, you are probably wondering, “what is my credit score? Where do I stand?” To answer this question, you can quickly check your credit score for free on trusted portals like CreditMantri. Alternatively, you can also download your credit score for a charge from any of the four credit bureaus.
How does my credit score affect my financial future?
Your credit score impacts your financial security in two significant ways:
- It affects your chances of securing a loan/credit card
Now that you have understood a credit score and its role let’s see how it impacts your financial independence. A low credit score implies that you are always credit hungry and over-rely on credit, which signals your financial instability to prospective lenders.
When lenders consider you in the high-risk, financially unstable category, they are not likely to sanction loans or credit cards for you. This is a huge drawback, especially in situations where you want to borrow money. Even if you are approved, the interest rate is likely to be high, making it difficult for you to repay the loan. Also, lenders have stricter terms and conditions when lending to borrowers with poor credit scores. This means you cannot qualify for larger loan amounts or longer tenures, all of which place an additional strain on your finances.
- You will pay higher interests on your loans
Let’s say you want to borrow Rs. 45 lakhs to purchase your dream home. You are planning to take a fixed-rate home loan for twenty years. If your credit score is in the excellent category, 750 – 900, the lender might charge you the lowest interest rate, which is currently 6.7%. In this case, the loan details work out as follows:
| EMI | Loan Amount | Interest Amount | Total Amount Payable |
| Rs. 34,083 | Rs. 45,00,000 | Rs. 36,79,858 | Rs. 81,79,858 |
Now, let’s say your credit score is in a lower range, say between 600 to 650. In this case, the lender charges you a higher interest rate of 8.5%. The loan details, in this case, work out as follows:
| EMI | Loan Amount | Interest Amount | Total Amount Payable |
| Rs. 39,052 | Rs. 45,00,000 | Rs. 48,72,491 | Rs. 93,72,491 |
Over the course of the loan, you would pay Rs. 11,92,633 more if you do not have a good credit score. Think about all that you could do with this extra amount.
As you can see, a high credit score is crucial in establishing financial independence. It not only makes it easier to secure loans but also reduces your loan burdens, helping you attain your financial goals faster.
5 Easy Tips to Boost your Credit Score
Now that you’ve seen the importance of your credit score in financial security, let’s go through some tips to improve your credit score and become financially free.
#1: Pay your Credit Card bills and Loan EMIs on Time
Timely repayment of your credit bills is one of the best ways to improve your credit score. Paying your bills on time shows that you are financially stable and responsible with debts. Timely repayments help you improve your credit score gradually over time.
#2: Keep a Check on your Credit Utilisation Ratio
The credit utilisation ratio is a factor that determines how much credit you have used to the overall credit limit. For example, if you have an Rs. 1 lakh limit on your credit card and used Rs. 60,000 on it, your credit utilisation ratio is 60%. Ideally, the credit utilisation ratio should be between 10% to 30% to improve your credit score.
#3: Take a Credit Builder Loan
You need a strong credit history to improve your credit score. Taking a small personal loan and repaying it on time creates a positive repayment track record in your credit history. By repaying this loan on time, you demonstrate that you are responsible with credit, improving your credit score.
#4: Rectify Errors on your Credit Report
Credit bureaus compile your credit score and history by collecting your credit information from banks and NDFCs. Sometimes there may be outdated or erroneous information on your credit report. For example, a closed loan may still be reported as unclosed. Such errors can pull down your credit score. The best way to avoid these errors is by monitoring your credit report and reporting the errors to credit bureaus to get them resolved.
#5: Work with Credit Repair Companies like CreditMantri
Sometimes, you require professional help to get your credit score back on track. Credit repair agencies like CreditMantri offer credit improvement services to help you analyse your credit score, understand what’s wrong and negotiate with lenders to resolve negative items on your credit report.
Build a Good Credit Score to Become Financially Independent
As you can see, having a good credit score is a must if you wish to become financially free. Follow the tips listed here to improve your credit score, achieve your financial goals and enjoy a financially secure and stable life.
