There are numerous factors that influence your ability to obtain a loan. One of the important factors is your credit score, as well as the information on your credit report, which will determine whether you can get a loan and what interest rate you will pay. Borrowers should know the importance of credit scores if they are attempting to buy a home, take out a loan for it, or try for a start-up, a business or make a major purchase. Continue reading the blog to understand why a credit score is important.
What is a Credit Score?
A credit score is a three-digit number that lenders check to understand your creditworthiness. It helps them to decide whether you get a mortgage, a credit card, etc. and the interest rate you are charged for this credit. The score is a representation of you as a credit risk to the lender at the time of your loan application. Every person has their own credit score. The lower your credit score is, the less likely you will be to get loans from lenders. If you are approved, you will have the burden of high interest rates.
Credit scores range from 300 to 900 and a credit score of 750 and above is considered good.
Many factors influence credit scores, either positively or negatively, as discussed below:
Factors that have a positive impact on credit scores:
- Making credit card payments on time
- Making timely loan payments
- Paying the entire outstanding balance rather than just the minimum due
Factors that have a negative impact on credit scores:
- Late or non-payment of credit card bills and loan EMIs
- Credit card maxing out or consistently exceeding 75% of the credit limit
- Paying only the minimum amount owed on credit cards; the balance is still considered past due
- Having an excessive number of credit lines, particularly unsecured ones
Why is Credit Score Important?
There are several benefits of having a good credit score. If you have a high credit score (750 and above), you can have:
- Decreased interest rates
- Increased loan amount
- More rapid loan approvals
- Extended repayment terms
Your credit score is as important as your employment history, salary, and other eligibility factors when applying for a loan. Ensure that your score is at least 750. 800 and above is an excellent score.
Also Read: How to Improve Your CIBIL Score Above 800
The applicant's repayment history is one of the criteria for loan approval. How do they discover it? By looking at your credit score. A good repayment history equals a high credit score.
A loan with no or low credit is possible, but expect a longer processing time because banks will perform additional checks. Furthermore, you may not always get the best deal.
To make sure that your credit history is error-free, review your report before submitting your loan application.
The following five elements go into calculating your credit score:
COMPONENT | COMPONENT WEIGHT* |
---|---|
Payment history | 35% |
Amount owed | 30% |
Length of credit history | 15% |
Credit mix | 10% |
New credit | 10% |
*Note that the component weightage is an approximate value based on market study and we do not hold any actual evidence of its accuracy.
Also Read: How is CIBIL Score Calculated?
How Your Credit Score Affects Your Loans?
Banks normally seek a score of 750 when assessing your loan application, which indicates that you have a strong track record of prompt loan repayment and are a low-risk customer. You stand a good chance of getting approved for a loan or credit card if your credit score is 750 or above. Banks, on the other hand, would almost likely reject your loan or credit card application if you have a low credit score and are hesitant to grant you credit.
There are many different types of loans available that you might wish to apply for. Let's examine the effects of the CIBIL credit score on each of these loans in more depth.
1. Credit score impact on the auto loan approval process
An auto loan can be used to purchase a vehicle. It could be a loan for a motorcycle or a loan for the purchase of a car. In addition to your income, several factors influence the amount you must repay. Another advantage is that you can borrow up to 90% of the invoice value of the vehicle. Although there is no minimum credit score requirement, it is recommended that you obtain a car loan if your score is at least 700.
You can still get a loan if you don't have a credit score of 700 or higher. However, the loan's interest rate will be on the high side. As a result, you might end up paying more in the long run.
2. Credit score impact on the approval of a personal loan
Because a personal loan is an unsecured loan, it already has a high-interest rate. There are no restrictions on how the loan can be used. That means you can use the loan to fund your child's education or to take your dream vacation. Because the loan is unsecured, no such collateral is required to hedge the risk. There is no minimum credit score required to apply for a personal loan. Because the bank will only lend you funds if you have a good credit score, the higher your credit score, the better your chances of having your loan application approved.
If your credit score is low, you will be able to obtain a personal loan at exorbitant interest rates.
3. Credit score impact on the Home Loan approval process
You can always apply for a loan to purchase your dream home. It is a mortgage loan. You can also borrow funds against your existing property. A loan of up to 80-85% of the property's cost may be made available. The repayment period ranges from five to thirty years. Many factors influence interest rates, including the city, location, current property rates, and so on.
Along with the previously mentioned factors, your credit score is very important in the Home Loan approval process. If you have a high credit score, banks will assume that you have always been a responsible borrower and that you can repay your debt on time without fail. As a result, the interest rate will be lower.
Lenders consider a credit score of 750 to 900 to be the best for quickly approving your loan application. This range indicates that the borrower used financial restraint when making debt payments. A score of 625 to 750 is considered moderate, indicating that the borrower carries some risk but still has a chance of getting loans approved. Lenders, on the other hand, are hesitant to give loans to people with a score between 300 and 625 because it indicates the borrower is very risky due to the possibility of defaulting on the loan.
Conclusion
Credit scores, ranging from 300 to 900, influence loan approvals. Higher scores signify lower risk and prompt approvals, lower interest rates, and higher borrowing limits. Maintaining a score above 750 is vital for accessing feasible loans across various loan types and achieving financial objectives. With financial planning, you can improve your credit score and get your housing loans.
DISCLAIMER:
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