Read How a good Credit Score can help you increase your savings?

22-Dec-2018 written by : FSI-Team

Credit Score can help you increase your savings?

Saving money for both short term and long term goals is a common phenomenon. Each individual would have savings on top of his mind for one or the other requirement. From down payment of the house or a car to saving money for child’s education or marriage and retirement, one does try to manage the finances to be able to achieve accumulation of the funds.

When it comes to thinking about building a corpus, the credit score would not even be in consideration. But the fact is that your credit score can aid and assist in building that corpus. The three digit numerical expression of your credit profile can add a lot to your bottom line which in turn can be dedicated to saving and thus helping in build wealth.

The common understanding is that the credit scores help in access to funds. However, a significant impact that the credit scores have is on the interest being charged to the borrower. The score can be defined as the probability of one defaulting on loan over a period of time. Higher the probability, higher the interest. Let us understand this little better with examples of a home loan, a car loan and a personal loan.

Home loan

A home loan is typically the largest loan that a person can take in individual capacity. The commitment on repayment is on a larger span and as the EMIs are worked out, the initial years see only a miniscule part of the actual loan amount being paid back. Major part of the EMI goes towards the interest in earlier years of the loan. If the score on CIBIL report is low then the housing finance company charting a higher rate of interest is inevitable.

On a loan size of 50 lakh for a 20 year term, the borrower would be required to pay an additional amount of about 10 lakh if the interest charged is only higher by 1%.

Car loan

A car loan as against the home loan has a shorter term, however the rate of interest being charged on these loan are substantially higher. A car loan rate of interest can have a differential pricing of up to 5% in case of bad credit. A car loan even on a smaller segment car would be for about 5 lakh.

A higher interest of 3% on a 5 lakh rupee car loan for a period of 60 months will increase the car’s cost by over 46 thousand rupees.

Personal loan

Being an unsecured loan, the personal loan is by far the most expensive loan product. The rate of interest on a persona loan ranges from 12% to about 36%. Depending upon various factors including the credit score the rate of interest in a few cases can even be higher than 36%. This staggering difference will only mean that the cost of funds will be quite high if one was to have access to a cash loan with not so good indicator of credit worthiness.

A good credit score will not only help in securing those loans or credit cards as and when you need it, but would also give you the advantage of lower interest rates, lower processing fee etc. All these discounts are going to help in bringing down the cost of fund.

Here we are only referring to the saving not taking into account the return that this saved money would garner if the same was to get invested into some instruments. Therefore, one must keep a close watch on it and check on the credit reports at least once in a year.



Don't miss a bit of Credit News
Join the FSI Force