Find out How your Credit Score Affects your Loan Eligibility

Find out How your Credit Score Affects your Loan Eligibility

Jan 5, 2024

Your credit score plays a pivotal role in determining the terms and interest rates of a loan, particularly for unsecured loans or personal loans that don’t require collateral.

In the absence of collateral, creditworthiness is assessed through a standardized process that examines your credit history. This history is encapsulated in your credit score, a three-digit number determined by independent, private organizations like CIBIL, Experian, Equifax etc.  based on your previous loans, repayment history,  including credit card debts and other borrowings.

The range of the credit score lies between 300 to 900. The closer the score is to 900, the higher the likelihood of your loan application being approved. This score has become a key criterion for all lenders when assessing unsecured loans.

However, the silver lining in the case of a low credit score is that the credit score is dynamic and not a static figure. This means that by adopting good financial practices, one can gradually improve their credit score over time for future loans.

Factors that determine your credit score

If you’re considering applying for a personal loan, it’s important to understand the factors pertaining to credit score that can influence your loan eligibility

  1. Repayment History: This refers to the consistency with which you’ve repaid your past debts. This factor accounts for ~35% of your total credit score.

  2. Credit Balance: This refers to the portion of your sanctioned credit that remains unused. The higher your credit utilization, the greater your risk of defaulting. Your credit utilization pattern contributes to around 30% of your credit score.

  3. Credit Tenure: The length of time for which you’ve availed credit and timely payment contribute to around 15% of your overall credit score.

  4. New Credits: Frequent inquiries about new loans or credit cards can negatively impact your credit score. It may give the impression that you’re overly eager to obtain substantial credits. This factor influences the credit score by a maximum of 15%.

  5. Credit Mix: The combination of secured and unsecured loans, as well as short-term and long-term credit, also plays a role in determining your credit score, contributing up to 10%.

  6. Maintain a Low Debt-to-Income Ratio: The debt-to-income ratio is a key factor that lenders consider when determining your creditworthiness. A lower ratio indicates that you have a good balance between your income and debt, which can positively impact your credit score. Use color to create hierarchy

How to improve your credit score?

Here are some steps you can take to improve your credit score should it fall between 300-500:

  1. Enhance Your Repayment Record: Rectify any defaults and ensure all accounts are in good standing.

  2. Lower Your Credit Utilization Ratio (CUR): Decrease your credit card outstanding. Alternatively, consider applying for secured credit card limits against your Fixed Deposits.

  3. Preserve Older Credit Card Accounts: Keep your older credit card accounts active and well-managed. You may consider closing newer accounts as it won’t affect the age of your credit history.

  4. Minimize Loan Accounts: Consider reducing the number of loan accounts you maintain by closing some of them.

  5. Balance Secured and Unsecured Loans: Strive to maintain a healthy mix between your secured and unsecured loans.

  6. No New Loan Applications: Refrain from applying for new loans until your credit score improves.

  7. Monitor Your Credit Score: Regularly track your credit score and plan your expenditure accordingly. You can get your free credit report here.

Credit Score & High interest Loan

It’s clear that your credit score significantly impacts your loan eligibility and approval process. Importantly, a higher credit score often leads to lower interest rates, providing an advantage over those with lower credit scores. 

Thus, your credit score is a key factor in determining the interest rate on your loan.

No Credit History?

Building credit history can be a challenge if you’ve never taken out a loan. However, this doesn’t necessarily mean you have a poor credit rating. Instead, it signifies that the credit rating agency lacks sufficient data to calculate your credit score. Despite this, you may still qualify for loans based on your income and other qualifications.

You can start building your credit history or improving your credit score today by checking it for free on Olyv (formerly SmartCoin).