In the modern banking world, the phrase “credit score” has become a key factor in determining a person’s ability to get a loan, get a credit card, or even bring home the car or house of their dreams.
Credit score in the banking world is one of the most important elements in the evaluation of credit risk by financial institutions, and an understanding of this concept is necessary for any individual who wishes to maintain their financial health.
What is a credit score?
A credit score is one of the most important things in the banking world. A credit score is a number or value that reflects how reliable a person is in repaying his debts.
This indicator is used by financial institutions to assess risk when providing loans or issuing credit cards to individuals or businesses. In short, a credit score can provide an overview of how good or bad a person’s financial history is.
Recently, the banking or financial institution system has used credit scores to assess their level of trust in potential borrowers.
Credit scores usually range from 250 to 900. The higher our credit score, the more likely we are to get approved for a loan with a better interest rate.
Function of credit score in the banking world
Credit scores have a very important role in the banking world, one of which is as a risk assessment tool. By implementing a credit distribution screening system that uses credit scores, banking companies have minimized their risk of loss.
1. Determining a borrower’s eligibility
A credit score is used to assess whether an individual or business is eligible for a loan. If a credit score is low, it is assumed that the person or business will have difficulty repaying loan installments.
This is definitely very dangerous for the finances of banking companies, because when a loan is distributed but the borrower is unable to repay it, the banking companies make a loss.
2. Determining the interest rate
The interest rate offered to borrowers or credit card holders might be influenced by their credit score. The greater a credit score, the lower your interest rate earned.
3. Credit card acceptance
When applying for a credit card, the bank or institution issuing the card will check the applicant’s credit score. A good credit score will assist in obtaining a credit card with a higher limit.
4. Credit limit determination
Financial institutions use credit scores to determine the extent to which they can provide credit limits to borrowers. The higher the credit score, the bigger the credit limit that may be obtained.
For example, persons with a credit score of 800 may be able to obtain high-limit credit of Rp50 million, whereas those with a credit score of 400 may only be able to obtain Rp20 million.
Things affecting credit scores
There are some factors that affect a person’s credit score, it’s important for us to understand these factors in order to improve
1. Payment history
Payment history is the biggest factor that influences our credit score. On-time payments improve credit scores, but late payments damage them.
2. Credit limit utilization
How much we use our credit limit also affects our credit score. The lower the credit card utilization, the higher the score.
For example, if we only have a monthly limit of Rp20 million and only use Rp5 million, our credit score will improve. However, if you use your credit limit up to Rp19 million, your credit score will most certainly be low.
3. Length of credit history
The longer we have a good credit or debt history, the better our credit score will be.
4. Types of credit used
The combination of the types of credit owned also has major effects on a person’s credit assessment. For example, a person with vehicle credit will certainly have a different credit score than someone who just has credit cards.
How to increase credit score
After knowing the definition of credit score in the banking industry and the factors that determine the score, we must be wondering what happens if our credit score is poor? What should be done to improve it?
Improving a credit score takes time and discipline, but there are some steps that may be taken to help improve it.
1. Pay installments on time
Pay all bills on time, including credit cards, loans, and other bills. If possible, pay ahead of time. For example, if the billing period is every 15th, pay on that day.
2. Reduce debt
Try to reduce debt, particularly credit card debt. Using a low credit limit can help us improve our credit score. The simplest thing we can do is sort out the use of credit cards, stop using credit cards for consumer needs.
3. Make a payment plan
If we have a lot of debt, create a structured payment plan and stick to it.
4. Keep track of credit history
Avoid closing old credit cards, because this can reduce our credit history. Also, avoid opening too many new accounts in a short period of time. Try not to be tempted by new credit card offers.
5. Correct the error in the credit report
Check our credit report regularly to ensure that there are no errors or negative information that should not be there. If there is any negative information, contact the issuing bank immediately to resolve the issue.
Utilization of OCR as a credit score assessment in the banking world
That is a short information of the definition of credit score in the banking world and how to improve it.
Knowledge of credit scores and how to improve them is very important in the banking world. By understanding this concept and taking steps to improve the credit score, we can gain easier access to loans and credit cards with better terms, as well as achieve better financial stability.
The reason is that banking companies are now increasingly sophisticated in assessing credit scores, by using the OCR tool, they may swiftly obtain the personal information and financial profiles of prospective borrowers.
One of the best OCR tools is OCR+ from Fintelite. Fintelite provides OCR tools that can automate the process of entering financial data and analyzing it swiftly and accurately.
