Think your personal loan depends on income? Your credit score says otherwise

A credit score is a three-digit number. This number basically ranges from 300 to 900. It is akin to a financial report card for an individual. Four major credit bureaus provide credit scores in the country: CRIF High Mark, CIBIL, Equifax, and Experian.

Lenders assess credit bureau scores before approving personal loans or credit cards. A credit score of 750 or higher is considered reputable. It reflects reliability and integrity in repayments.

How to boost your credit score effectively?

To boost your credit score effectively, you should follow the given steps diligently:

1. Pay your personal loans, home loans and credit card bills on time without fail. It is important to keep in mind that on-time repayment makes up about 35% of one’s credit score. It is a reflection of reliability, composure and financial discipline.
2. Try to maintain a credit utilisation of below 30%; this way, you can showcase prudent credit management. For example, if your credit card limit is ₹2,00,000, then you should never exceed ₹60,000 on credit. This way, lenders will never see that you are a credit-hungry borrower.
3. Avoid applying for several personal loans, home loans or credit cards at once. Every single application can trigger a ‘hard inquiry’, and such an inquiry can temporarily reduce your credit score and damage your credit profile.
4. Always maintain a healthy credit mix. This means you should try to have personal loans, credit cards and home loans in your name and repay them with absolute determination. A diverse credit mix can help you boost and improve your credit score. It can also make future loans easier to secure.
5. Your credit history is vital for a strong credit score. That is why you should keep older credit accounts active. Decade-old credit cards, personal loans, or home loans, if managed properly with on-time repayments, can be immensely beneficial for your credit score and overall credit profile.

What are the benefits of a high credit score for personal loans?

The following are the benefits of a high credit score for personal loans:

1. A high credit score, preferably over 750, helps in the easier approval of loans and credit cards.
2. It also significantly reduces the default risk probability. This translates into flexible repayment terms, attractive interest rates, along other perks.
3. Lenders offer higher loan amounts and better credit limits to individuals with exceptionally strong credit profiles.
4. Banking institutions design pre-approved loan offers, seamless credit lines for applicants who have an impeccable track record of repayment and a clean credit history.
5. Borrowers can use their credit scores to leverage and negotiate better, more lucrative loan deals that offer higher loan amounts and easier repayment terms.

Credit score range and interpretation

Note: The credit scores discussed above are illustrative in nature. These scores differ from one credit bureau to another and depend on a host of different factors, such as repayment potential, length of credit history, and credit utilisation, among others.

Before applying for a personal loan, aspiring borrowers should consult a certified financial advisor for proper guidance. Not only this, but one should also clearly understand the risks associated with personal loans, such as high interest rates, complex repayment clauses, and high processing fees.

In conclusion, smart borrowers should utilise personal loans strategically to manage their debts and establish a strong credit foundation, thereby securing better loan terms and easier access to credit in the future.

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Disclaimer: Mint has a partnership with fintech companies to offer credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article aims to educate readers and raise awareness about the essential needs for credit, including loans, credit cards, and credit scores. Mint does not promote or encourage taking credit, as it comes with risks such as high interest rates and hidden charges. We advise investors to discuss with certified experts before taking any credit.