Before you get your loan approval, lenders carry out multiple checks to ensure that you have the capacity to repay the borrowed amount along with the interest rate. Whenever you approach a lender for a loan, you will notice that one thing they are most concerned about is your credit score.
This is a 3-digit number that can largely affect your lender’s decision to approve your loan application. Lenders place a hard enquiry on your credit report and calculate your credit score to assess your credit profile and determine your creditworthiness.
Therefore, if you are considering applying for a loan, don’t forget to check credit score online and ensure that it meets your lender’s minimum requirement. For instance, lenders at Clix Capital ask for an Experian credit score of 630 or above to approve your personal loan application. So, let’s find out how significant your credit score is, how it can affect your loan terms and conditions, and what steps you can take to improve it.
What is a Credit Score?
Credit Score is a 3-digit number that credit bureaus calculate based on your credit history, including your repayment habits, payment status, days past due, and length of credit.
Lenders look at your Experian credit score to determine your creditworthiness, based on which they decide whether to approve or reject your loan application. Ranging from 300 to 900, most lenders ask for a credit score of 630 or above.
The higher your credit score is, the better your chances of getting loan approval at competitive interest rates. Therefore, check your free credit score online and ensure that it matches your lender’s requirements before you apply for a personal loan.
Factors Affecting Your Credit Score
Credit bureaus calculate your credit score based on the following six factors:
Payment History: You can build your credit score by regularly repaying your credit card bills and loan EMIs. If you miss or delay your repayments, your credit score will reduce.
Credit Utilisation Ratio: If you use more than 30-40% of your credit limit, your credit utilisation ratio increases and affects your credit score calculation. With a high credit utilisation ratio, credit bureaus perceive you as a credit-hungry borrower, which reduces your credit score.
Credit Length: The more extended credit history you have, the more experiences you have in handling credit. That is why it is advised to retain your old accounts so that credit bureaus can get an idea of your experience and give you a higher credit score.
Diversity in the Credit Profile: The type of credit you handle plays a vital role in calculating your credit score. You must be experienced in handling different types of credit, including long-term and short-term loans, secured and unsecured loans, credit cards, and other accounts.
Debt to Income Ratio: Ideally, your total debt repayments should not consume more than 40% of your monthly income. A high DTI ratio reduces your credit score and damages your creditworthiness.
Hard Enquiries: The lenders pull out hard inquiries on your credit report whenever you apply for a loan. Multiple inquiries made within a short time may project you as a credit-hungry borrower, negatively affecting your credit score.
Significance of Having a High Credit Score
Your credit score can significantly affect your finances and creditworthiness. A high credit score projects you as a low-risk borrower, while a low credit score reduces your eligibility for loans and credit cards. Having a high credit score is significant for your finances in the following ways:
Increased Loan Eligibility: Simply put, a high credit score improves your loan eligibility. A credit score higher than 630 indicates that you are a responsible borrower with regular repayment habits. Lenders perceive you as a low-risk borrower and agree to approve your loan easily and quickly.
Higher Loan Amount: A borrower with a high credit score becomes eligible for a bigger loan amount. The higher your credit score is, the more risk the lender can take for you.
Reduced Interest Rates: Applicants with a high credit score are likely to get lower interest rates on their loans due to the lower risk involved for the borrower.
Easier Terms and Conditions: Lenders agree to offer easier loan terms and conditions to borrowers with high credit scores, such as reduced processing fees, discounted late payment charges, and others.
Longer Loan Tenure: Lenders don’t want to risk their money to a high-risk borrower for a long time. However, if you have a high credit score, they may agree to approve your loan for a longer repayment tenure without difficulty.
Also Read: What to Expect When Your Credit Score is 750?
Tips to Improve Credit Score
Before applying for a loan, you must check your credit score online and ensure that it meets your lender’s minimum requirement. If it is low, use the tips mentioned below to improve your credit score:
- Go through your credit report and ensure that there are no errors in it. If you notice any wrong entries, unknown accounts, spelling mistakes, or any other discrepancies in your report, bring them to the credit bureau’s attention and dispute them. Once they correct the errors, you will see an instant boost in your credit score.
Also Read: 10 Simple Ways to Increase Your Credit Score in India
- Diversify your credit profile by taking different types of credit, including secured, unsecured, long-term, and short-term loans, credit cards, and others.
- Never miss your credit card bill and loan EMI payments.
- Increase your credit limit to reduce your credit utilisation ratio.
- Retain your old accounts and credit cards to prolong your credit history.
- Avoid making too many loan queries during a short period, as it may pose you as a credit-hungry borrower and reduce your eligibility.
Now that you see the significance of credit score for your creditworthiness, start improving it and enhancing your loan eligibility. Once you achieve a credit score of 630 or above, you can apply for a personal loan and business loan at Clix Capital at competitive interest rates.
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