A credit score is a 3-digit number that ranges from 300 to 900 and it is calculated by the 4 credit bureaus – Equifax, Experian, Transunion CIBIL ™, and CRIF Highmark. Each credit bureau uses its own algorithm to calculate the credit score. Multiple factors including the credit history, repayment behavior, and so on are used to compute the credit score.
Whenever lenders decide to give you a loan, they check your credit score. A good credit score leads to easy loan approval while lenders may not consider giving loans to people with a bad credit score. Even if you get a loan with a bad credit score, you may not get a low-interest rate and a high credit limit. So, it is essential to improve your credit score if it is poor and also maintain a good credit score consistently. Let us now read on to find out the importance of credit score in getting a loan.
What Is an Ideal Credit Score?
There are 4 credit bureaus in India, and each of them have their own credit scoring model.̣ So, the range of your credit score will vary depending on your credit scoring model. Although ranges vary depending on the credit scoring model, generally credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and up are considered excellent.
Importance Of Credit Score In Getting A Loan
- Helps You Qualify For Loans: A good credit score makes you eligible for loans and credit cards. A good credit score suggests that you are financially disciplined, have not defaulted with repayments, and have handled your credit well. When you have a good credit score, lenders will trust that you will repay your loan on time as you have low chances of defaulting.
- Credit cards: A good credit score will help you get a credit card with attractive rewards and cashback. With a credit score of 750 and above, you may be able to get a credit card best suited to your requirements.
- Lower rate of interest: When banks and other financial institutions find that you have a very good credit score, they will offer loans and credit cards at lower interest rates. You will also have higher negotiating power with a good credit score and can bargain for better interest rates with your lenders. You could use the different offers that come from various lenders to your advantage and get the best one that suits your needs.
- Loans with a longer period: when you have a good credit score, you will get loans with longer time durations.
- Discounts on processing fees and other hidden charges: Lenders may offer discounts on processing fees and other hidden charges for consumers with a good credit score.
- Higher Credit Limit: Having a good credit score will suggest to banks and lending institutions that you are handling credit in a disciplined way. So, they may give you higher loan amounts and credit card limits. So, when you want to make big-ticket purchases or need huge amounts of money for situations such as medical emergencies, a good credit score will come in handy.
- Faster Approvals of Loans: when you have a good credit score, your loan application will get approved quickly and you do not have to keep waiting. Lenders also give pre-approved loan offers to consumers who have a long credit history and a good credit score.
How To Get An Excellent Credit Score
The following tips will come in handy to improve your credit score whether your credit score is bad, fair, or good.
- Monitor your credit reports regularly: It is essential to monitor your credit reports regularly. By checking your credit reports regularly, you can spot what is bringing down your credit score and get it resolved immediately. For example, if any wrong or incomplete information is hurting your credit score, then you can dispute it with the respective credit bureau.
- Make timely payments: Making timely payments is important for your credit score. So, it is always important to pay on time and not default on your payments. It is a good idea to set up payment alerts so that you do not forget about your EMI or credit card payment due dates.
- Pay In Full: While it is always important to make your payment on time, it is also essential to make your payment completely. By making complete payments, you can avoid the accrual of interest on outstanding payments. Since the interest gets added to the outstanding balance and becomes a part of it, interest becomes payable on the accumulated interest as well. This will lead to huge outstanding balances and defaulting of payments.
- Avoid applying for multiple credit: Everytime you apply for credit, there is a hard inquiry, and this will lead to the lowering of your credit score by a few points. But of course, they will bounce back rapidly. Avoid sending out multiple applications as it will hurt your credit score and will bring down your chances of getting a loan.
Conclusion: It is important to maintain a good credit score to apply for loans such as personal loan, home loan, business loans, and credit cards. So, if your credit score is bad, you can start taking steps to improve it. These points on the importance of credit score in getting a loan would have made you understand the vital role a credit score plays in getting loans.