In the present day economic environment, the financial sector in India is going through a lot of turmoil due to rising instances of NPAs, frauds, and defaults. As a result, all of the financial institutions in India, including banks and NBFCs (non-banking financial companies), have become very stringent with the eligibility criteria for a loan application. One factor which is assigned highest importance is your credit score, which determines your creditworthiness and eligibility for a loan.
What is a credit score?
In simple terms, a credit score can be described as the numerical representation of your creditworthiness. Credit score in India is measured out of 900. There are various credit rating agencies such as CIBIL Trans Union, Experian, and so on, who measure your credit score based on a number of parameters like a number of loans, credit history, and so forth. Most lenders want a credit score of 750+ when they approve a loan application.
Whenever you Apply for a Unsecured Personal Loan or any other type of loan, the lender would immediately take out your credit score and will process your application only if your credit score is above the specified threshold. A credit score is not built overnight, it is a gradual process and requires financial discipline from your side. If your credit score is damaged due to any reason, it will take months if not years to repair it and your Personal Loan options would be very limited.
Factors impacting a credit score
A credit score is calculated by the rating agency based on a number of parameters and through a confidential process. Here are 5 most important factors that have a drastic impact on your credit score:
- Payment History: It is the single biggest factor that impacts your credit score. If you have a good track record of making repayments of your EMIs on time, your credit score will remain high. This applies to all categories of loans such as Home Loan, unsecured Personal Loan, Credit Card, term loan, and so on.
So, while taking out a loan, you should consider your repayment capacity and only take as much amount as much you can pay. Otherwise, if there are any bouncing or late payment, your credit score will go for a toss. This will reduce your Personal Loan options significantly.
- Credit Utilisation Ratio: Always make it a point to keep the outstanding balance on your Credit Card below 30%. If it is above 30%, it reflects poorly on your credit score, and the lenders consider you as irresponsible
You need to make sure that you repay the entire amount due on your Credit Card every month and do not fall into the trap of minimum payments. Always pay your bill in full as otherwise the unpaid amount gets carried over to the next month affecting your credit utilisation. If you maintain your credit utilisation ratio below 30%, it will boost up your credit score.
- Age of Credit Lines: It means how old your loan account and Credit Cards are. If you have a credit line with a long history, it reflects that you are a responsible borrower and have been paying your dues on time that is why the account is still active, it has a significantly positive impact on your credit score.
So, you should refrain from the habit of jumping from one Credit Card to another as it reflects financial indiscipline and desperation, maintain one or two cards and operate them properly. It would work wonders for your credit score.
- Active Accounts: The number of active loan accounts and Credit Cards that you are running also has an impact on your credit score. Your credit report has a detailed list of various loans and Credit Cards that you have availed in the past and had at present.
It also reflects how they accounts were operated, any overdue amount or any defaults or write-offs. All these small factors combine to have a significant impact on your credit score. Always close your old accounts properly, settle all the dues in full and remember to obtain a no-objection certificate from the lenders.
- Number of Queries: The number of queries made under your name is also significant contributors to your credit score. There are two types of queries, soft queries, and hard queries. Soft queries are those queries that have been made from your side to check your credit score and have no impact on the credit score.
But the queries made by the bank or lenders are hard queries and impact your credit score. If you apply at too many places and there are too many queries against your account, it has a negative impact on your credit score as it reflects desperation from your side.
Credit score has become a significant factor in determining your eligibility for a loan. So you should always keep a check on your credit score and try to improve it whenever you get a chance.
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