Credit score is a key factor considered by lenders and card providers when you apply for a loan or a credit card. However, instead of keeping an eye on our credit report regularly, most of us make the mistake of checking it only when we apply for credit. Many also believe that checking their credit score negatively affects it. However, only hard enquiries have a negative impact on your credit score and such enquiries are initiated only when you apply for a loan or credit card. When you check your CIBIL score for free, through credit bureaus or a third-party platform, it is a soft enquiry and does not impact your score negatively.
Not keeping an eye on your credit report could not only keep you from building a good score, but might also make loan or credit card approvals difficult. Here are a few reasons why it is important to check your credit score on a regular basis:
(i) Helps in Understanding how your Financial Habits Affect your Credit Score
Checking your credit score frequently can help you understand and analyze the impact of your financial habits on your score. For instance, if you are paying your existing EMIs on time and in full, you can note the improvement in your score. Similarly, if you opt for paying the minimum amount due in a month, you may check if there is any direct impact or not due to partial payments or due to the overutilization of your credit limit.
Thus, by frequently tracking your credit report, you can understand what has impacted your score, in a positive or negative way. This way, you will know how to improve your score in case you see a drop in the future, by sticking to what impacted it positively. Similarly, you can avoid the negative actions, so that the credit score does not fall.
(ii) Helps in Maintaining a Good Credit Utilization Ratio
Credit Utilization Ratio (CUR) shows the portion of your total credit limit that you have already utilized. Credit bureaus give the second highest weightage to CUR at the time of calculating your credit score. A very high CUR indicates that you are highly dependent on credit and it might result in a lowered credit score. You can find the details related to CUR of each of your credit cards on your credit report. By checking your credit score and reading the detailed report regularly, you will be able to understand how much credit you have utilized on each card and find ways to maintain a low CUR on each of your cards.
(iii) Helps in spotting errors on time and rectifying them
Amongst many reasons for a poor credit score, incorrect information to the credit bureaus could be most crucial and yet negligible. Lenders and card issuers offer all information, such as on-time payments, late payments, partial or full payments, credit utilization ratio, etc. to the bureaus. While most of these are as per your financial behaviors, at times, there could be reporting errors on part of the providers, lenders or bureaus that frame your credit report.
Some of these errors could be related to the issuance of unsolicited loans or credit cards, fraud or unauthorized transactions, missed records of on-time payments, or may be typing errors. Therefore, the best way to avoid these errors is to check your credit score from time to time. In case of a sudden drop, you must check your credit report in detail, and must report any of such errors to the credit reporting company.
Suggested Read: How Can I Secure A Personal Loan With Bad Credit?
(iv) Helps in Understanding your Creditworthiness
As mentioned above, credit score is a crucial parameter to avail any form of credit, and is a mirror to your financial health. Thus checking your credit score frequently can help you understand your financial withstanding and your creditworthiness. This will be more relevant if you are looking forward to availing a personal loan or home loan in the near future.
For instance, if you have a low credit score, you can take appropriate measures to build and improve it on time. Thus, you can be prepared to avail credit and reduce your chance of loan rejection and ensure easy approval. A good credit score at the time of loan application can also help you avail credit at a comparatively lower interest rate. People with a good credit score can also get several pre-approved offers on loans and credit cards.
On a concluding note, checking your credit score regularly is an important step towards building an excellent credit score. You cannot build your credit score in a day. Thus, keeping an eye on it regularly can definitely help you build it, by allowing you to identify and take appropriate measures at the right time.