A person who have applied for a loan would be well aware of a credit score, but first-time loan appliers are often confused about the term. So, they must know what a credit score is? Most borrowers are unaware that a credit score makes a direct impact on your personal loan application.
What is a Credit Score?
A credit score is a numerical representation of a credit history of a person that reflects their current and past financial well-being. The score is used to depict the risk tolerance and creditworthiness.
The Credit Information Bureau (India) Limited (CIBIL) is an agency that provides the credit score and report on payments pertaining of a person to loans and credit cards. In other words, it is a record of how you treated your liabilities? Your CIBIL score shows your creditworthiness and indicates the probability of a default based on your credit history.
When you apply for a loan, a lender will take your debt history and make a comparison between the debts you are looking to borrow. It is an objective metric that helps person to understand how much money they can borrow from borrowing companies?
Credit Score can also be used as a benchmark by lending companies and it takes into account the credit history – the loan a person has taken, whether the repayments were made on time, your income, applications rejected by lending companies and more.
CIBIL Scores Numbers You See On Your Credit Report?
- 700+ (No-risk zone): A score above 700 is counted as good score and helps you secure a loan easily.
- 600-700 (Less-risky zone): A score in this range will help you borrow from lenders. However, to calibrate your creditworthiness, banks will check different other factors like sources of income other than your regular one, the stability of your job, etc.
- 300-600 (Risky zone): A score between this ranges is considered risky by banks and they refrain from funding people in this category.
- 1-5: This range reflects under six months of credit history.
- -1: This credit score reflects there is no credit history.
Why Credit Score is Important for a Personal Loan?
Most lending companies ask for a credit score/CIBIL score at the time of loan application to check the creditworthiness of an applicant. As the lending company gets data from your CIBIL score, they will be able to make a judgment based on the score.
Now we will look at some of the reasons why a good credit score important to get a personal loan quickly?
Affects the Personal Loan Application:
A good credit score is mandatory part of the financial services industry and directly impacts your personal loan application. It makes your loan application faster for approval as lending companies will undertake credit score checks to see if it meets their eligibility requirement. Getting loan approval faster means you saves a lot of time, and lenders will be able to quickly move on to verification and other subsequent procedures. When your personal loan gets approved, it will improve your credit score too.
Impresses your Creditworthiness to a Lending Institution:
If you have a bad credit score then an applicant can’t apply for a personal loan. A good CIBIL score will determine whether you can be trusted to repay a loan as per schedule or not. In addition, it will help to convince the lending company that you are financially responsible, and have a clean record of repaying your loans (including credit card bills) on time. Since the lenders are convinced of your creditworthiness given by a high score, it can be beneficial; as it will help get the loan sooner than the others.
Helps get a Lower Interest Rate:
Many lending companies will offer a lower interest rate to personas who have high credit score compared to interest rates offered to individuals with a low credit score, all other things being equal. If you do not have a good credit score and apply for a personal loan, you may have to pay higher interest rates, or your loan application may even get rejected.
How can you improve your Credit Score?
As we have discuss above, there are many reasons why a good credit score is mandatory to get quick approval for personal loans. The lending companies go for a CIBIL score check, that’s why it is an excellent idea to improve your CIBIL score before filling out a personal application form.
These are the steps you can take to improve your credit score:-
- Pay your EMIs on time, credit card payment too. Timely payment of EMIs make a positive impact on your credit score.
- If you have multiple loans, combine them into one loan and try to negotiate for better interest rate. This way, you will improve your loan to value ratio rating, enhancing your chances of quick approval.
- Do not apply for multiple loans at one time, since every loan application rejection hurts your credit score.
- Always prefer to pay your EMIs in full, rather than try to attempt part-payments.
- Try to do not utilize more than 40% of your over-all credit limit
Do not apply for a personal loan if you have a low credit score, as it will lead to rejection of your application which will further lower your credit score.
Conclusion
People prefer personal loans as the terms and conditions are less stringent when compared to other loans. You do not have to spend a lot of time for getting loan and then waiting for approval. A good CIBIL score helps to convince the lending company that you are a trustworthy borrower and helps to faster approval of loan application. Getting a personal loan is not easy thing if you have low credit score hence, it is important to have a good credit score.