Questioning or having a doubt on importance of credit health is as good or as bad as asking similar questions on importance of one’s physical health. We all know that we need to be physically well in order to sustain and perform our duties in life. Similarly we need to be credit healthy in case we wish to have continued access to credit in our life. Goes without saying that akin to ill health, bad credit health will also lead to impairment and non-achievement of our objectives.
What is credit health?
Let us first understand as to how it will get defined. Just like a physically fit person will be able to do rigorous activities at any given point of time, a credit healthy person will be able to get credit facility from the lender of his choice at any point of time.
How does credit health help?
To sum up every way in which the credit health can help, it can be stated that “credit health helps in achievement of financial goals”
How to assess credit health?
One just needs to obtain the CIBIL score to be able to ascertain the level of credit health. Measured at a scale of 300 to 900, a credit score of 750 and above is deemed to be healthy.
Why is credit health important?
Timely access to credit
In today’s consumerism driven world, we need funding from buying a house to a smart phone. In the absence of funding we may not be able to buy a lot of items that we may wish to. Let us take an example of a car which has become almost essential despite all transport options. Suppose one wishes to buy a car and is unable to secure a loan for it, the only option that he would be left with is to save enough money to cover complete cost. To be able to save lakhs of rupees in a short span will not be possible for most. And by the time the money gets saved over a few years, the cost of car may have gone up. Non access to car loan will not only lead to inconvenience but would also make the whole proposition more expensive.
Think of a situation, where one gets an opportunity to trade an item that would save him some money. But on account of lack of funds (and non-availability of credit) one may have to forego the opportunity.
Thus timely access to credit is of high importance. Not only is it required to meet materialistic needs or opportunities but the absence of funds at the time of exigency can be devastating.
Cost of funds
There may be a remote chance of one getting funding from a lending institution that has a higher appetite of risk if one persists on applying for a loan for low CIBIL score. But such funding may come at a substantially higher cost in comparison to the cost to a credit healthy person.
Let us understand one thing quite clearly. Every lender desires of lending to individual or entities who will pay back the loan in time. Any delay in repayment will lead to losses for the bank or any other lending institution. In such a situation, credit healthy people will get offered better rate of interest apart from more favorable terms when they come to borrow. On the other hand a person who is not credit healthy will get charge a far higher interest rate.
Let us look at an example. One is looking for getting funded to buy a house worth Rs 50 lakh. Now, getting charged an interest higher only by one percent can lead to additional outflow of lakhs of rupees over the loan term. This will not only increase the cost of funds but the overall cost of buying house will also get increased.
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