When you apply for any kind of loan, be it a personal loan, home loan or loan against property, one of the critical factors that all lenders consider while determining your eligibility is the credit score. Your credit score is a reflection of your creditworthiness and credit history and hence it plays a critical role in your loan application being approved.
If your credit score is high, the lender will see you as someone prudent in finances and may help you get credit at favourable interest rates and repayment terms. In contrast, if your credit score is low or less than the minimum score required by the lender, the lender may either reject your loan application or agree to offer the credit at a higher interest rate.
If you are a first-time borrower and don’t know what a credit score is or how to improve your credit score, then this guide is just for you.
What is a good credit score?
A credit score is a three-digit number ranging from 300 to 900 that reflects your creditworthiness. The score is assigned to every individual by the different credit bureaus based on their financial history, financial habits, and credit-based transactions.
A high credit score means low credit risk, increasing your chances of getting the loan approved faster and with better terms and conditions. Generally, most lenders, including banks like South Indian Bank, consider a credit score of 730 and above an ideal score for granting a home loan.
However, the minimum credit score required may change from one bank to another and depend on the kind of credit you want to avail.
Factors that affect your credit score
The credit bureaus in India compute your credit score based on several factors, including:
It is perhaps the most significant factor affecting your credit score. If you have repaid your dues, including loans, credit card bills, etc., on time and consistently in the past, your credit score is likely to be high. In contrast, if you have defaulted on your loan repayments or delayed the EMI payments, your credit score will dip.
The credit utilisation ratio is basically the credit limit you use against the limit available to you. When you use a high percentage of the credit limit, it reflects your credit-hungry behaviour and could potentially affect your credit score. So, to improve your credit score, it is better to keep the credit utilisation ratio below 40%.
Every time you apply for any type of credit or credit card, the financial organisation will initiate a hard inquiry against you. So, if you apply for multiple loans or credit cards simultaneously or within a short duration, multiple enquiries can negatively affect your score.
Having a good mix of credit, such as secured loans (car loan, home loan, loan against property) and unsecured loans (personal loans, credit card) in your portfolio, can have a positive impact on your credit score as it shows that you are responsible in credit management.
How to increase your credit score – valuable tips
If your credit score is low and you are looking for ways to improve it, there are many options. All it requires is financial discipline and a strategic approach.
- Keep a check on your Credit Utilisation Ratio
While trying to increase your credit score, you must keep a close tab on the Credit Utilisation Ratio, i.e., the percentage of the credit limit that you use against your overall limit. Always aim to keep the ratio below 40 to maintain a healthy score. If you have any outstanding balance, try to repay as much as possible to lower the Credit Utilisation Ratio.
Paying all your EMIs and credit card bills on time, i.e., on or before the due date, is critical to maintaining a high credit score. If you miss even a single payment or delay the payment even by a single day, your credit score will take a significant hit. It is better to set a reminder for the EMI payments or even better, automate the payments.
- Avoid applying for multiple loans
If you try to apply for multiple loans at short intervals, each application will trigger a hard inquiry into your credit report. This can negatively impact your credit score. So, it is advisable that you compare the different lenders and loan options and avail of credit only when you need it.
- Review your credit report
Another simple yet effective way to improve your credit score is to get a copy of your credit report from a known bureau like CIBIL (Credit Information Bureau India Limited), review it, and identify any discrepancies or errors in it. Errors or incorrect entries in the report can negatively impact your credit score. If you find any such errors, immediately report them to the credit bureau, provide the necessary documents to support your claim, and get them rectified. This can help improve your credit score.
- Diversify your credit portfolio
Having a good mix of credit in your portfolio can positively impact your credit score. A mix of secured and unsecured forms of credit, like a car loan or personal loan, showcases your ability to responsibly handle different types of loans.
Conclusion
Your credit score is a key determinant in shaping your journey. By understanding the factors that influence the credit score and taking necessary steps to improve it, you can take control of your financial health and improve your creditworthiness.
And, if you are looking for any kind of loan, be it car loan, personal loan, home loan etc., you can trust South Indian Bank to get the desired credit at the most affordable interest rates.
Disclaimer: The article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of The South Indian Bank Ltd. or its employees. The South Indian Bank Ltd and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial/non-financial decisions based on the contents and information’s in the blog article. Please consult your financial advisor or the respective field expert before making any decisions.