Good credit scores are the key to assured loan approvals. Apart from the basic eligibility criteria, credit scores are the deciding factor for approval, as well as interest rates.
Your credit score is a number derived from an analysis of your credit history, which proves your creditworthiness to potential lenders. It helps financial institutions determine the level of risk they would take on if they sanction your loan. The higher your credit score, the lower the risk to the lender, which means that it’ll be easier for you to obtain your loan.
Components of Credit Score
To be able to build a good credit score, you need to know what goes into calculating one.
Payment History
Your loan repayment history accounts for 35% of the weightage of your credit score. Lenders examine your history of borrowing to ensure that their loan to you will not turn into a liability. Because of this, one way to increase your credit score is to ensure that you clear any outstanding debts on time and as soon as possible.
Debt Capacity
30% of your credit score is calculated using this parameter. Debt capacity refers to your debt-to-income ratio. Let’s say your income is Rs.20,000 per month, and every month, you pay off a debt that involves returning Rs.10,000 to the lender. Potential lenders will take note of the fact that you use half of your salary to do this every month. This, and factors like type of income and stability of the source of income could affect your credit scores.
Duration
15% of your credit score depends on the age of your various credit accounts.
Inquiries
10% of your credit score is influenced by the number of times banks or other lending institutions make inquiries to CIBIL to find out your credit score. The more times lenders put in a request for your credit score, the lower it gets. There are a couple of exceptions to this, so make sure you do your research and plan your loan applications keeping in mind that they could affect your credit score.
Credit Mix
The last 10% of your credit score is calculated based on the number of types of loans you’ve taken. A diverse range of loans is better than many loans of the same type. For example, an auto loan, a mortgage, and a credit card—a mix of these types of debts will boost your score. Of course, you need to pay these off in a timely fashion for this 10% to actually be useful.
How Good Credit Scores Ensure Guaranteed Approval
When you apply for a personal loan, credit scores influence two factors—loan approval and rate of interest.
With a higher credit score, you have a higher probability of approval. Try and maintain a credit score of at least 650 to be eligible for most loans you might need. Higher scores also mean lower rates of interest. With a low score, your loan rates are likely to be high and there is also a fair chance that your request will not be approved in the first place.
By maintaining a good credit score, you prove to your lender your commitment, punctuality, and loyalty towards paying off your Personal Loan.
