One of the things that our previous generations had advised us was about the importance of reputation. The importance of reputation and trust, however, cannot be undermined. In fact, it does take years to build a reputation and then days to destroy it. Isn’t it?
When we talk about the financial world, reputation thus one has, plays a major role in how one is perceived by everybody else. Now no one would like to deal with someone who has a bad reputation whenever it comes to money. Isn’t it?
And then when it comes to finances, an individual’s reputation is thus dependent on how he chooses to pay his debts. Does he pay it on time or not? Does he take the loans either often or rarely? Has he ever been accused of the avoidance of a loan completely?
And these are the questions that a credit report answers with the help of a Credit Score.
A credit score is thus an indicator of your credit-worthiness and it is calculated based on financial history. So if the borrower’s financial history is not that great, i.e. he is perceived to be a high-risk borrower, then the credit score will be lower.
A lender would thus not want to lend money to risky borrowers. This is because no one wants to increase their chances of losing money? This is thus the reason that the applicants who have low credit scores are always asked to pay higher loan interest rates, to compensate the lender for an increased risk.
In unsecured loans like a personal loan, there is thus no collateral. So with no recourse to any of the security in case of failure to repay the loan, the lenders would compensate themselves for the higher default risk that they are thus taking by charging a higher interest rate. And this thus seems justified.
For the young borrowers, who are paying their small loans initially in their careers helps in building a good credit record. This also improves the credit score. This also helps in the long term when the applicants intend to borrow large amounts like a house loan.
So, if you have a loan currently, then he must make sure that he is paying all the EMIs on time without any delay. It would thus also help you to improve your credit score.