Beyond Three Digits: The Role of Credit Scores in Loan Approvals

The lending industry is growing in India. From vehicle purchases to home purchases, people rely on loans for different kinds of needs. Moreover, due to the rise in the fintech industry, there are so many players providing you loans quickly and on easy terms.

While scrutinizing the loan application, banks and financial institutions assess your documents and credit score. A credit score is an essential part of the loan assessment process. It is the first thing a loan assessor will go through in the loan screening process. Let's dive deeper and understand more about credit scores.

What is a Credit Score?

Credit Score is a three-digit score that summarizes an individual’s credit history. It is used by banks and NBFCs (Non-Banking Financial Corporations) to determine your creditworthiness. A higher credit score gives more chances of getting a loan approved and that too at lower interest.

On the other hand, a low credit score represents that you are unable to maintain your debts properly and can affect your loan application negatively. Avoid taking too much debt and pay EMIs in a timely manner to maintain a good credit score. You can check credit score online.

Role of a Credit Score in Lending

Credit score has an important role in the loan application process. It is the first step to credit assessment. You may apply for a credit card or any type of loan. But the credit score is the first thing taken into consideration by lenders.

A borrower’s ability to repay the loan or not can be determined by credit score. It is an essential part of risk assessment. Credit rating organisation determines your credit score. Some of the popular ones are Equifax, TransUnion Cibil and Experian. The majority of lenders use the credit score issued by these organizations.

This credit bureau collects information about you from member institutions and companies. They have all the information about your borrowings as well as personal information.

Importance of a Credit Score

1. A good credit score improves your chances of getting a loan approved. As it determines that you are regular in paying off your debts.

2. Any lender before offering you the loan will check your credit score.

3. Having a good credit score helps you in getting a loan of higher ticket size and at a lower interest rate.

4. It is easy for you to get good credit cards with the best offers if you have maintained a good credit score.

How to Maintain a Good Credit Score?

Here are some of the ways through which you can maintain a good credit score:

1. Pay installments on time

Regular payments of installments are very important to maintain a good credit score. Any delay or bounce in installments can directly affect your credit score. You can activate the auto-pay option from your bank account to avoid any bounce or late payment.

2. Avoid multiple enquiries in the short term

Every time you apply for a loan or credit card to banks or financial institutions, there will be a credit enquiry recorded in your name. If there are frequent enquiries in the short term then this can affect your credit score. It represents that you are in dire need of debt which is not a good sign.

3. Monitor your credit utilisation ratio

The credit utilization ratio is the ratio determining the credit used by you from the available credit. One shall not have a credit utilization ratio of more than 30%. To maintain this ratio, you need to limit your spendings.

4. Check your credit score on regular basis

Have a check on your credit score on a regular basis. There are chances that your credit report may have an error due to which your credit score is affected. If any error is found, get it rectified as soon as possible.

5. Avoid cancelling old credit cards

The older the credit, the more is your worth. So, avoid closing older credit cards. If you pay the credit card bills on time then older credit cards will show good history. In fact, closing old credit cards also closes your older records. This may impact the score negatively.

6. Avoid taking too much loan

If you have too many loans then it is a sign that you rely too much on debt. It also can get you into a debt trap and you may find it difficult to pay off your debts. So, assess your needs properly and take loans accordingly.

Conclusion

Maintaining a good credit score is necessary for easy loan sanctioning. With a good credit score, you can get a loan of a higher amount and that too at easy terms. You can easily check credit score online. Pay EMIs regularly, maintain CUR and avoid taking many loans to maintain good credit scores.