Your credit score is a huge determining factor when it comes to loan approval. It is one of the first things that a bank or financial institution checks when you approach them, making it an important aspect of your financial life that you just can’t afford to ignore. Of course, your complete profile will also be considered, but do take special care of your score.
A good starting point would be to get a free CIBIL score from the credit bureau so that you know where you stand. This is an especially crucial step prior to loan application. Read on to know more about the credit score, and how it impacts you.
What is a credit score?
A three-digit number between 300 and 900, the credit score is generated by a credit bureau. It is a crisp overview of your credit report, which tells a lender about your creditworthiness. A high or good credit score can open doors in the financial world for you, when it comes to making an application for a loan or credit card. While every lender’s criteria may differ slightly, there is no doubt that a score of 750 and above will make anyone sit up and take notice!
What goes into a credit score?
Wondering what are the parameters at play when it comes to your credit score? Read on to know more!
Payment history on past as well as current loans and credit card accounts
New credit that you have availed of
The length of credit history, i.e. how old your accounts are
A credit mix, which consists of various debt products
The credit utilisation ratio, which indicates just how much you seem to rely on credit
Other factors that banks consider
In addition to the credit score, banks also consider certain other factors such as your income and the amount you currently owe on existing loans and credit cards. They also look at the amount of loan you have requested for, together with the loan tenure. Whether your application is for a secured or unsecured loan will also have a role to play, especially keeping in mind your income and expenses.
However, here’s why the credit score is important. Say for instance you apply for a personal loan for low CIBIL score. Here, a bank may not reject your application outright because of the other factors being considered. However, a low score may not give a lender the confidence to offer you the best rate of interest since they too need to hedge their bets.
How to improve your credit score
Given the above, you’d agree that it is indeed important to make sure that your credit score is not just high but that it remains that way as well. Here are some crucial tips that should help you on your journey to improve your credit score.
Making payments in time: Being late on your credit card and loan payments can pull your score down. The situation is further complicated if you skip making the payment entirely, as this looks alarming from a lender’s perspective.
Do not default on loans: Charged off or settled loan and card accounts reflect negatively on your credit report, as do accounts that have gone into collections. Do make sure that you work out a solution to repay existing debt if you don’t want your score to dip drastically as a result of these charges.
Maintain old credit cards: Don’t shorten the length of your credit history if you have a good, old card account. If you have maintained it well by ensuring timely payments, this can in fact give your score a boost.
Applying for fresh credit: It’s simple, really – if you don’t need a loan or card, don’t apply for one! Not only does it make you look like you’re constantly in need of credit within a short interval, but every such application results in a hard enquiry on your credit report. This impacts the score, albeit temporarily.
Apply for a credit card: The above doesn’t hold true if you want to start building a credit score, however! Apply for a new card and be sure to use it prudently – this can instantly help boost your credit score.
Check your credit report: At regular intervals, do make sure that you check what’s in your report, because any erroneous or inaccurate information can prove detrimental to your score. Further, you need to make sure that every account mentioned therein belongs to you – protect yourself from identity theft even as you protect your credit score!
It’s important to remember that while a personal loan for low CIBIL score is not impossible, it is also not optimal at the same time. Instead, with some perseverance and patience it is better to improve your credit score.
Start with availing a free CIBIL score from a credit bureau today, so that you can take charge of your financial health confidently, now and well into the future!