When you transact using Credit Card, you exhibit your credit behaviour.
You may not need take money from your credit card because you do have money in your savings account. However, when you use your credit card, you are telling the credit monitoring agencies that “Hey, look! I have taken this credit and on so and so date, I paid it off”.
Banks look at your credit behaviour before they lend you loans. And these days, your credit scores matter a lot. The simple reason is the banks lend you at differentiated rate of interest tied to the credit scores. You get differentiated interest rates on housing loans, car loans and personal loans based on the credit scores.
So, in a way , you’re using your credit score to buy money at a cheaper rate. The banks want to be assured that their money is landing in safe hands. While banks lend, they have to carry a certain level of risk of default on interest and the loan amount.
Your credit score is your image that the lenders are able to see and understand the risk that may be attached while lending you.
So, your superb credit score implies that the loan money is landing in safer hands. And safer the lending is perceived, the rate of interest will be proportionately lower.
This allows the banks to improve their overall risk mitigation and maximise their loan portfolio. This is also why loans with safer securities attract lower rate of interest for loans. The lesser the risk , the lesser will the interest rates be.
This is why housing loan is treated as the cheapest form of retail lending. Your car loan is again cheaper than the personal loan.
