A credit score is a three-digit number corresponding to every potential borrower in the market. Credit bureaus calculate the scores after referencing your credit history. It ranges from 300 to 900 – the number can vary for different bureaus. A credit score of 750 or above is considered good and can increase the chances of loan application being approved by the lenders.
You can check your preferred lender’s website to know which credit bureau they are associated with. While CIBIL is used extensively in India, Experian, the world leader, is gaining ground in the country. You need to check credit score regularly and maintain a good score to ensure that you can get a loan approved in one go.
You can visit any credit bureau’s website and follow the process mentioned there to know your credit score. Bureaus like Experian do not offer unlimited access to your credit scores and history. Instead you get an updated credit report every 30 days when you sign-in to the account. You can also sign up for notifications which will alert you to any key changes in your credit activity.
Remember, the score is updated in real-time, and hence, the score you checked on Wednesday may change by Saturday because of a missed payment.
Before you check the score, know the minimum score the lending institution requires.
How to maintain a good credit score to be eligible for a loan?
To maintain a significantly high credit score, you need to have a good credit history. Here are a few steps that can help:
1. Take time to understand the factors that affect your credit score. Keep a check on the score and take corrective action when you see the score is going down.
2. Pay all the outstanding bills, including credit card payments and all EMIs on time. Maintain continuity while repaying the EMIs of your loans
3. Maintain a stable and steady income and significant funds in your account at all times to avoid bounced payment requests.
4. Keep a distance between your credit card applications. i.e. do not apply for multiple cards in a short span of time.
5. Check the EMI before applying for a loan. Suppose you are applying for a personal loan, then use the personal loan calculator to decide if you can repay EMIs on time without adding stress to your current finances. Every payment made on time increases the score, and a missed payment leads to a lower score.
Role of a credit score in pre-qualification of a loan
When you apply for a loan, the lender will verify documents submitted, this process is known as pre-qualification. Salary slips, employment history, age, and residency, all play a crucial role in establishing your eligibility. Nevertheless, your credit score is equally important.
The minimum credit score requirement will vary across lenders and the type of loan that you want. For example, a personal loan may have eligibility of 750 or more, while the same lender may require 650 or more for a loan against property.
The minimum score required will also vary depending on the credit bureau the lender depends on for their scoring.
There may be times when your score is lower than what your lender expects. In such a situation, you need to take steps to improve the credit score immediately.
Steps you can take to improve your credit score
- All credit card payments and EMIs have an impact on your credit score. Ensure you are paying your credit card bills on time.
- Maintain your debt to income ratio. The DTI indicates the percentage of your income that you are using to repay EMIs and other credits. Lenders are wary of approving loans with a higher debt ratio (30% and more).
- Filing loan applications for the same loan with multiple lenders can hurt your credit score. In the end, only one will get approved, and the rest will get rejected. Rejection leads to a lower score.
- Ensure your lender changes the loan status to closed once you have repaid a loan.
Remember, no authorized lending institution in India will approve a loan without the requisite credit score. So, follow the above steps to improve your score as well as loan eligibility.