Understanding the Impact of Credit Score on Your personal loan Eligibility

New Delhi (India), March 23: Credit bureaus analyse an individual’s activity relating to credit cards and loans and give them a 3-digit number to summarise their credit history. Whenever a loan seeker applies for a personal loan, lending institutions check this score to decide whether to deny or approve the loan request. Ranging from 300 to 900, a score above 630 is good enough to convince top lending institutions about an applicant’s personal loan eligibility. Hence, understanding how this numerical expression affects loan eligibility is crucial, as it helps maintain a good credit score and access a loan when required. 

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What is a Credit Score, and What Does it Imply?

A credit score is a crucial parameter lending institutions use to decide an applicant’s eligibility for a personal loan. A high credit score indicates responsible credit behaviour and long-term financial maturity, convincing lending institutions of timely repayment from the borrower. A number close to 900 is high, and a score over 630 is favourable for personal loan eligibility. A score below 630 is low and increases the chances of loan rejection.

How Does a Credit Score Impact Loan Application?

The credit score impacts a personal loan application in the following ways:

Loan Approval: A credit score above 630 establishes an individual’s creditworthiness to prospective loan providers, resulting in faster loan processing, higher chances of approval, and speedier fund disbursal.

Interest Rates: Those with a low credit score are likelier to pay higher interest rates to loan providers. Since such borrowers have higher chances of missing EMIs and defaulting on their financial obligations, financiers try to balance the risk by charging them a higher interest rate. On the other hand, a high score enables them to negotiate lower interest rates and better loan terms.

Sanction Amount: A good score indicates dependable credit habits, projecting them as creditworthy borrowers with the least risk involved. Consequently, loan companies feel more confident in lending them a higher loan amount suitable to their needs.

Factors Affecting the Credit Score

The credit score is crucial to getting approval for a personal loan. Aspiring borrowers can check their scores online in seconds and understand their implications. Here are a few factors that affect this 3-digit number negatively or positively:

• Positive Factors: 
• Timely payments towards credit card bills
• Consistent loan EMI payments before the due date
• Paying the entire outstanding balance rather than just the minimum
• Long credit history with responsible credit behaviour
• Diversity in the credit portfolio with different loan types    
• Negative Factors: 
• Late payment or non-payment of current loan EMIs and credit card bills 
• Maxing out credit limits consistently
• Maintaining a high overdue amount on credit cards
• Possessing too many unsecured loans or lines of credit

When applying for a personal loan, the credit score is as crucial as an applicant’s salary, employment, history, DTI ratio, etc. For applicants, 630 is a great number to maintain as a credit score before applying for a personal loan. How an individual has handled credit in the past is a crucial factor that credit bureaus consider while evaluating their credit score. Good repayment history is equal to high credit scores. Getting a personal loan on a low credit score is also possible, but lending institutions may charge a higher interest rate from such applicants.

Sometimes, errors in the credit report affect the credit score and reduce personal loan eligibility. Therefore, getting a copy of the document, checking it carefully to identify any errors, and getting them rectified by the credit bureau is essential before applying for a personal loan.

Reasons behind a Low Credit Score

A high credit score proves responsible credit handling in the past with all due payments on time. It assures consistent EMI repayments to prospective lending institutions, increasing the likelihood of getting a personal loan with favourable terms and conditions. On the other hand, a low score is a red flag indicating higher chances of defaulting.

Here is a summary of common reasons behind a low credit score to help understand why it negatively impacts loan eligibility:

• Delayed or Missed Repayments: Inconsistent payment of existing loans indicates an unstable financial condition.    
• Multiple Loans:Handling several loans simultaneously indicates a high debt burden and reduced repayment capacity.    
• Frequent Loan Inquiries:Several loan inquiries within a short period are a sign of being in desperate need of funds.    
• High Credit Utilisation Rate:Utilising a high percentage of the available credit limit implies irresponsible handling of finances, which could be a red flag for personal loaneligibility.    
• Inaccurate Diversity in the Credit Portfolio:A lack of balance in the variety of loans in the credit portfolio is another cause of concern for loan eligibility.    
• No Credit History:No credit history means insufficient data for the credit bureaus to predict an individual’s repayment behaviour.

Steps to Improve the Credit Score

Low personal loan eligibility due to low credit score? Here are a few steps to improve the score and improve eligibility:

• Make All Payments on Time: Delayed payments are major factors affecting the credit score. Therefore, one should avoid delays and pay all EMIs and credit card bills on time.    
• Control the Credit Utilisation Rate: Ideally, an individual should only use 30-40% of their credit limit on average. Maxing out on credit cards adversely affects the credit score.    
• Correct Errors in the Credit report: A sudden drop in the credit score may be due to an error in the credit report. Therefore, it is crucial to check the report frequently, identify any errors in it, and report them to the credit bureau for immediate correction.    
• Increase the Credit Limit: Requesting an increase in the credit limit is a quick way to boost the credit score. As the credit provider increases the credit limit, it reduces the credit utilisation ratio and improves loan eligibility.    
• Retain Old Credit Accounts: A long history of handling credit responsibly gives a good credit score to the individual. Therefore, retain old credit cards and credit accounts to prolong the credit history, as closing them will affect the score and reduce eligibility for new loans.

A high credit score projects an individual as a responsible borrower, helping them receive loans with favourable terms and conditions. It also helps to get lower interest rates and flexible repayment terms on loans.

It’s time to check your personal loan eligibility for a suitable loan offer and apply online today!