What is Credit Score? Importance of credit score in loan approval

What is Credit Score: Nowadays, whenever you talk about taking a loan, one word is often heard – “Credit Score.” But do you know what is this credit score and what is its importance in loan approval? Credit score works as a parameter that shows your financial credibility. If you have to take any kind of loan – be it a personal loan, home loan or car loan – your credit score plays an important role. In this article, we will understand what is credit score, how does it work, and what is its importance in loan approval.

What is a Credit Score?

Credit score is a numerical representation of your creditworthiness. The score usually ranges from 300 to 900, with 900 being considered the best score. Credit score is determined by financial institutions such as CIBIL (Credit Information Bureau India Limited) or other credit rating agencies. The score is based on a number of factors such as:

• Repayment History: How you have repaid your old loans and credit card bills.
• Credit Utilization Ratio: How much of your available credit you use.
• Credit Mix: What combination of secured and unsecured loans you have.
• Loan Enquiries: How many times have you applied for loans.

If your credit score is high, it means that you are a responsible borrower who fulfills his financial obligations on time. In contrast, a low credit score indicates that your repayment history is not satisfactory.

Role of Credit Score in Loan Approval

Credit score plays an important role in the loan approval process. If your credit score is good, your chances of loan approval increase and you get favorable terms. Below are some ways through which credit score has an impact on loan approval:

1. Fulfillment of Eligibility Criteria

Credit score is a primary criterion for financial institutions. Banks and NBFCs often demand a minimum credit score to approve a loan. If your score is less than this threshold, your application may be rejected.

2. Impact on Interest Rates

If you have a high credit score, you get lower interest rates, because the lender trusts that you will make the repayment timely. Applicants with low credit scores have to pay higher interest rates, because they are considered to be at greater risk.

3. Loan Amount and Tenure

A good credit score helps you get a higher loan amount and flexible repayment tenure. Lenders often give preference to borrowers who have a good repayment record.

4. Approval Speed

A good credit score makes the loan approval process faster. Lenders do not take much time to evaluate your financial profile.

How to Improve Your Credit Score?

If your credit score is low, there is no need to worry. With a little time and planning, you can improve your credit score. Below are some steps that will be useful for you:

• Timely Payments: Repaying your loans and credit card bills on time ensures that you have a good repayment history.
• Reduce Credit Utilization: Try to keep your credit card utilization below 30%.
• Rectify Errors: Check your credit report on a regular basis and report any mistakes for immediate correction.
• Do not overapply for new loans: Every time you apply for a loan, there is a hard inquiry which can negatively impact your credit score.
• Use Secured Credit Cards: If your score is low, getting a secured credit card and making timely payments will help you improve your score.

Impact of Credit Score on Financial Profile

Credit score not only helps in loan approval, but also impacts your overall financial profile. Having a good credit score indicates that you are a financially disciplined person. It also helps you in obtaining other financial products, such as credit cards and overdraft facilities. On the other hand, a low credit score reduces your financial credibility and may make it difficult for you to obtain new financial opportunities.

Importance of different types of loans and credit score

The importance of credit score is different for different loans. Some loans require a high credit score, while some require a moderate score. Some examples are given below:

• Personal Loan: This is an unsecured loan, so it is completely based on the credit score. Favorable terms will be available only if the score is high.
• Home Loan: Credit score is very important for home loans, but applicants with moderate scores can also qualify due to being secured.
• Car Loan: Moderate credit score is important for car loans due to being secured, The credit score is used, but the interest rates are low if the score is high.
• Business Loan: For business loan, along with credit score, the profitability and cash flow of your business is also seen.

Common Misconceptions About Credit Score

There are some misconceptions about credit score which create confusion among people. It is important to understand them:

• Low score means not getting loan: It is not necessary that you will not get loan if you have low score. Lenders also give loans at high interest rate.
• Credit score is fixed once: Credit score is dynamic and changes according to your financial behavior.
• No Credit History Is Better: Having no credit history is considered even more risky than a low credit score, as lenders do not have data to evaluate.

Conclusion

Credit score is a financial tool that can make your loan approval process easy or difficult. If your credit score is strong, you will find it easier to get a loan and you will get favorable terms. Therefore, maintaining and improving your credit score is important for everyone. Always make timely payments, keep credit utilization under control, and improve your financial habits. Take care of your credit score from today and move towards a safe and prosperous future.