A credit score for a Personal Loan represents the creditworthiness of a borrower. It is a number given by credit bureaus like Experian and CIBIL to help loan providers understand the trustworthiness of the borrower. Lending institutions use it to determine whether a borrower would be suitable for a loan and what interest rate they will offer. When your credit score is high, you become a creditworthy borrower, resulting in lower interest rates and better loan terms.
A credit score is determined by factors such as your payment history, credit utilisation, and length of credit history. You will likely have a good credit score if you have a strong track record of making on-time payments and maintaining low debt balances.
While lending institutions consider other factors too when approving Personal Loans, having a good credit score can give you a major advantage in the application process.
How is your credit score determined?
Many factors contribute to calculating your credit score for a Personal Loan. Here are some of the most significant ones.
- Repayment history: This refers primarily to your ability to repay all your previous debts. An estimated 35% of your credit score is based on this factor.
- Balance of your credit: This refers to the remaining amount of the credit you have the authority to use but have not used. It is more likely for you to default on your loan if you have high credit utilisation. Around 30% of your credit score is based on your credit usage pattern.
- Duration of credit: Your ability to repay credit on time during the agreed tenure contributes approximately 15% to your overall credit score.
- New credits: Making too many inquiries regarding new credit cards or loans may be detrimental to you. It may project the impression that you are overly concerned with obtaining large amounts of credit. An estimated 15% of the credit score is affected by this factor.
- Credit mix: Your credit score is also affected by your combination of secured and unsecured loans and long-term and short-term credit by around 10%.
What is a perfect credit score?
An Experian credit score of 630 or above is considered good by digital lending institutions like Clix Capital, which offer low-interest rates on Personal Loans. It may be challenging for you to get approved for a Personal Loan without a credit score. You may still secure a loan with a low credit score but at a higher interest rate.
That said, there’s more to securing a Personal Loan than having a good credit score. Lending institutions look at other factors, like employment history, income, and debts too.
What is the impact of Credit Score on your ability to obtain a small Personal Loan?
There are two ways in which your credit score affects your eligibility for a Personal Loan.
- The overall eligibility: A person’s credit report is crucial in assessing whether they are qualified to receive the loan. Almost all financial institutions offer large unsecured loans to borrowers with a high credit score. Conversely, less creditworthy borrowers may have difficulty meeting the loan providers’ eligibility requirements. For example, you can qualify for a Personal Loan for a low credit score; however, you may not be eligible for a larger loan amount with such a score.
- Interest rate: Your credit score also affects the interest rate you will be charged. An individual with a high credit score is more likely to be offered a loan with a lower interest rate by the lending institution. Although a poor credit score may still enable you to obtain a Personal Loan for a low credit score, the interest rate in such a case will be higher. It is because a poor credit score indicates a high probability of default.
How can you improve your credit score?
Now that you have learned how your credit score affects your borrowing ability, here’s how to improve your credit score for a Personal Loan.
Pay your EMIs on time
Missing even one payment can affect your credit score and make getting approved for a loan harder. So, if you’re looking to take out a Personal Loan, stay on top of your payments and make them on time each month.
Don’t apply for several loans at once
Lending institutions typically report new inquiries to the credit bureaus. Each inquiry can slightly lower your score. Multiple inquiries on your report can signal the lending institutions that you’re desperate for cash or may take too much debt. When you’re planning on applying for a Personal Loan, it’s important to space out your applications so that they don’t all show up on your report at once.
If your finances permit, consider shorter loan terms
Ideally, you should choose a shorter loan tenure and repay on time to build your credit score. However, choosing a shorter term may not always be possible as it depends on your income and repayment capacity. Opting for a longer loan term helps reduce the EMI amount and make timely repayments to improve your credit score for a Personal Loan.
A credit score is an essential parameter for getting a Personal Loan because it is one of the factors lending institutions use to assess the risk of lending to a borrower. A high credit score indicates a low risk, meaning the borrower is more likely to repay the loan. When you plan to take a Personal Loan, check your credit score at the Clix Capital website and apply online to get fast approvals with quick disbursals.