Financial literacy is important for any country’s economic progression. It is an ability to understand financial terms and make financial decisions to grow your wealth. An individual who is financially literate can smartly allocate their income towards various goals. Understanding the basics of personal finance, budgeting, and debt repayment can help you navigate the financial marketplace with self-assurance. According to a recent report, only two out of three borrowers in India understand what a CIBIL score is and its importance. This research was carried out by Home Credit India across seven cities to understand the levels of financial literacy amongst loan borrowers.
The following are the results of the survey:
- 68 per cent of the respondents did not know their CIBIL score.
- 43 per cent said that they had partial knowledge of the interest rate calculated on their home loan, car loan, or personal loan.
- 76 per cent of the borrowers were unaware of the interest charged on their loans.
- Only 17 percent of borrowers in Delhi, 19 per cent in Jaipur, and 24 per cent in Mumbai were aware of the interest charged on their loans.
- 74 per cent of the respondents were keen on learning financial lessons to manage their finances better.
- 44 per cent of the respondents across cities could understand the difference between credit and debit cards.
CIBIL Score
A CIBIL score is a three-digit number that is calculated based on an individual’s financial history. Usually, a CIBIL score ranges between 300 to 900 and people with a higher score have better chances of loan approval. A borrower’s CIBIL score is determined on numerous factors such as the type of credit, credit history, payment history, etc. Loan applicants with a good CIBIL score have more advantage over those with a lower score, such as lower rate of interest, quick loan approvals, higher approval limits, and access to additional offers, among other such benefits.
Importance of Understanding Credit for your Financial Literacy
Your CIBIL score is determined on numerous factors such as your payment history, guarantors on the loan, credit history, and outstanding loan amount, etc. It is the backbone of your financial life, and having a good CIBIL score helps you meet your financial goals with ease. Hence, it is advisable to familiarize yourself with the factors that contribute to your CIBIL score:
- Payment History
An individual’s payment history is a big contributor to their CIBIL score. Paying your personal loan debts and obligatory bills on time can help strengthen your credit score. On the other hand, defaulting on loan payments can drastically bring down your score.
- Credit Utilization
This ratio is the amount of credit you have utilized from the allotted credit limit. It is always advisable to keep your credit utilization ratio low or else it may harm your credit scores. To keep the credit utilization low, you need to ensure you pay off all your credit balance as soon as possible.
- Credit Mix
Having a good mix of credit can help you maintain a good credit score. The lender would prefer to see you manage multiple categories of credit, from education loan, credit cards, mortgages, or other types of secured loans. This will demonstrate your ability to manage all sorts of credit and help you reach an excellent credit score status.
- Hard Inquiries
When you seek credit from a bank or a financial institution, the lender will want to go through your credit track record. Applying for a new line of credit, for example, a personal loan for self-employed individuals will be reflected as a hard inquiry on your credit report. However, too many hard inquiries in a short time would make you look like a credit-hungry borrower and may also be seen as if you’re seeking credit that you can’t repay.
CIBIL Score Check
Numerous financial companies and lenders offer to check your credit score. For instance, at Finserv MARKETS, you can check your CIBIL score for free at no extra cost. To check your score, you can simply fill in your details and access your credit score online for free. Also, you can check CIBIL score by PAN card, an online process where you are required to enter your details and get the results for your score.
Lack of financial knowledge can lead to several pitfalls including a poor credit score, credit history, or even bankruptcy. Financial literacy is a necessity and understanding personal financial management, budgeting, and making investments will help you be in control of your finances. Understanding basic financial concepts can prove to be valuable throughout the rest of your life. Good luck!