Credit Score for Personal Loans : Whether it’s a medical emergency or a dream vacation, personal loans are versatile financial tools that can cater to various needs. However, as personal loans fall under the category of unsecured loans, meeting specific eligibility criteria is essential. Among these criteria, your credit score plays a pivotal role in determining your personal loan eligibility and the associated interest rates. Let’s delve into understanding what a credit score is, its significance in personal loans, and strategies to enhance it.
What is a credit score ?
A credit score is a three-digit numeric summary that reflects an individual’s credit history, serving as an indicator of their creditworthiness. Issued by RBI-registered credit bureaus like TransUnion CIBIL, CRIF High Mark, Equifax, and Experian, a credit score, for instance, ranges from 300 to 900 in the case of TransUnion CIBIL.
How does credit score matter for a personal loan?
In the realm of loans, there are secured and unsecured categories. While secured loans are backed by collateral, unsecured loans, such as credit cards and personal loans, lack such security. Personal loans, being unsecured, heavily rely on the borrower’s creditworthiness and repayment ability. This is where the credit score comes into play, guiding financial institutions in evaluating the applicant’s credit behavior.
Determining Factors Using Credit Score:
Loan Eligibility:
Most financial institutions consider a CIBIL credit score of 750 or higher as healthy. Falling below this threshold may lead to rejection of a personal loan application. While a good credit score is crucial, meeting other eligibility criteria is equally essential.
Interest Rate:
A higher credit score often translates to a lower interest rate on personal loans. For instance, a score of 800 or above may result in a 0.25% to 0.50% reduction in the interest rate. However, this varies among financial institutions.
How to improve your credit score?
1. Timely Repayment:
Consistently paying existing loan EMIs and monthly credit card bills on time sends a positive message to financial institutions, showcasing responsible borrowing habits. Timely repayments hold significant weightage in calculating credit scores.
2. Lower Credit Utilization Ratio:
Maintaining a credit utilization ratio of 30% or lower contributes to a good credit score. This ratio signifies how much credit you’re using compared to what’s available.
3. Controlled Loan Applications:
Avoid applying for numerous loans or credit cards in a short timeframe, as it may negatively impact your credit score. Maintaining a sufficient gap between applications is advisable.
4. Balanced Mix of Loans:
Strive for a healthy mix of secured (home loans, vehicle loans) and unsecured loans (credit cards, personal loans). This mix positively influences your credit score.
5. Keep Old Credit Cards Open:
The tenure of loans and the duration of holding credit cards affect credit scores. Older loans and credit cards contribute positively. Avoid closing old credit cards, even if not in active use.
In conclusion, a good credit score is the linchpin for personal loan eligibility. Whether you’re seeking funds for a medical emergency or a leisurely vacation, maintaining or improving your credit score is crucial. It not only opens doors for personal loan approval but may also secure a lower interest rate, providing financial benefits in the long run.
