Personal loans can be an absolute saving grace in times of financial uncertainty. This unsecured, consumer loan may be used to finance any type of expense as it does not come with an end-use criterion. Whether it is to meet a cash crunch, fund a wedding, or pay for an urgent travel trip, this loan is a great financial safety net. With the push on digital, lenders today offer processes with minimal documentation and quick disbursal. However, as with any type of loan, a lender evaluates your repayment capacity before sanctioning the personal loan.
A healthy credit profile with a good score is the most important criteria for a personal loan. Apart from this, the lender also evaluates your income stability and looks for a favourable debt-to-income ratio. In this article, we focus on the credit score and understand how it is a driving factor when getting a personal loan.
Read on without further ado.
Understanding the Credit Score
Simply put, your credit score is an indicator of your creditworthiness as a borrower. In India, credit scores are awarded by popular bureaus like Experian and TransUnion CIBIL. Several key factors, such as the number of credit enquiries, repayment history, credit mix, as well as history of loan accounts are taken into consideration to calculate your credit score. A CIBIL score ranges from 300-900, and the higher it is, the stronger your credibility. Upon applying for a personal loan, a higher credit score may bring you many lucrative benefits, such as a lower interest rate, longer repayment tenure, and a higher loan amount.
Threshold of the Credit Score
A credit score that is over 750 is considered to be extremely good. It indicates healthy borrowing habits and adequate repayment capacity to the lender. Personal loan lenders are likely to offer you a high borrowing limit at a beneficial interest rate with such a score. On the other hand, a CIBIL score below 700 indicates that you are a sub-par borrower. It could mean that you have a lower borrowing capacity for different reasons. Borrowers with a low credit score are considered to pose a higher risk of default. As a result, lenders approve a lower amount of personal loan at a higher rate of interest.
Factors That Affect the Credit Score
As mentioned above, credit bureaus will evaluate your credit profile before awarding a score. The assessment is based on the following factors:
- Number of Enquiries: Every time you apply for a loan or a credit card, the lender undertakes a background check to evaluate your eligibility. So, if you apply for multiple loans and credit cards in a short period, you will be considered credit-hungry and your score will take a hit.
- Repayment History: The repayment history reflects your regularity with respect to making timely payments towards your loan EMIs and credit card bills. Missing these payments significantly affects your credit score.
- Credit Mix: A mix of secured and unsecured loans positively impact your credit score. So consider getting a home loan, a loan against property, and a credit card to improve your overall credit score.
- Credit Utilization Ratio: The fact that you have multiple debts as well as a high credit card utilisation ratio indicates that you are already making too many payments. This risky financial behaviour negatively affects the credit score.
Efficient Ways to Improve Your Credit Score
You can always work towards improving a bad credit score or maintaining a healthy one. Some of the easy yet effective steps include:
Timely Bill Repayments: Apart from being a healthy financial habit, paying your bills on time is imperative to maintaining your credit score. Late payments hurt your score and your repayment track record has a direct effect on your future borrowing capacity. So, always strive to make payments before the due date.
Debt Consolidation: Lenders typically become suspicious of your financial status when you have too many active debts. You may also be paying off too many high-interest rate loans. Consolidating your debt is a wise way to reduce your open debt accounts and stabilize your credit score.
Maintain Unused Credit Cards: You must maintain credit cards even if they are unused. As long as you do not incur annual charges on these, keeping them open will positively affect your credit score.
Maintaining a healthy credit score will help you to get the best financial deals on loans. It promotes a lender’s opinion of you as a reliable, creditworthy borrower. So, keep a track of your credit summary through Bajaj Finserv MARKETS to understand your credit standing. Also, make sure that you make timely payments towards your loans and credit card bills.
To avail hassle-free personal loans online, head on to Finserv MARKETS and check out the offerings, now. You can also check your CIBIL score through the free ‘credit score check’ and track your eligibility.
