What Credit Score Do I Need to Get a Personal Loan?

Akshay was looking forward to getting his home renovated. He had hired contractors, and the renovation work had just begun. He had already applied for a personal loan to fund the renovation and was waiting for approval. However, his loan application was rejected, and this came to him as a shock. He was eligible for the loan, had a stable income, and had also provided the necessary documents. He could not figure out why his loan application was denied. On further inquiry, he was informed that his credit score did not make him eligible for the loan.

Akshay had no idea that a credit score could play a role in his loan application.

If you are sailing in the same boat as Akshay, here is what you need to know about the importance of a credit score if you want to apply for a personal loan. 

What is a credit score?

A credit score is a number which has significant importance in your loan application. It is an expression which is based on an analysis of your credit. It represents the creditworthiness of an individual and is based on a credit report. Banks and NBFCs use your credit score to estimate your ability to make the loan repayment on time. Your credit score will determine if you are eligible for the loan, the interest rate on the loan and loan amount. 

The range of a CIBIL score is between 300 to 900. Anything above 700 is considered to be a good score, but less than 700 does not mean you have a bad score. You can get a loan with a low credit score as well but you consistently need to work towards improving the score. The higher the score, the lower your risk profile. Most of those who get a personal loan have a credit score of 700 and above. You can get a personal loan at a low credit score but you might have to pay a high-interest rate on the personal loan.

Where can I see my credit score?

You can see your credit score in your credit report. There are credit bureaus like CIBIL which collect information from different sources in order to create a credit report. You can get free access to your credit report once in a year.

What makes a credit score?

There are different aspects that a credit bureau considers when building your credit score. These are elaborated below.

1.      Payment history: Your payment history forms 35% of the score. It reflects whether you pay the EMIs or your credit card bills on time every month.

2.      The Amount owed: The amount you owe in your credit accounts and loans form 30% of the credit score. The lower amount you owe, the better it is for you. This amount will be considered concerning the credit limits.

3.      Length of credit history: This is 15% of the credit score. It includes time-related factors like the age of your individual accounts, age of the oldest account, and the average age of all the accounts you own.

4.      New Credit: This criterion has a 10% value in your credit score. All your newly opened credit accounts and the recent applications for credit will be included under this category.

5.      Credit mix: The last 10% is the mix of credit you owe. It includes the different types of credit you have in different accounts.

How do I improve my credit?

If you have a good credit score, you will easily qualify for a personal loan at a favorable interest rate. The actual difference in interest rates between applicants with excellent credit and a good credit is less than you think. However, if you do not have an excellent credit score, do not worry! There are different ways you can build a credit score or improve your score.

1.      Pay your dues in time: This is the most essential aspect of building a good credit score. You need to pay your EMIs and credit card bills on time to enjoy a good credit score. Even one late payment will be reported in your credit history and will have an impact on the credit score.

2.      Pay the minimum balance: If you use a credit card and have exhausted your limit, then you need to ensure that you pay the minimum credit card dues. This is generally 5% of the outstanding amount.

3.      Monitor your score: You need to have a thorough overview of your credit report. You are allowed a free copy of the report from every bureau once in a year. When you get the copy, you need to look for any inaccuracy in payment history, balance, and questionable collections. Contact the bureau if you notice any mistakes in the report.

4.      Do not take too many loans: Nobody applies for a loan without reason. However, if you have several outstanding loans, it will become difficult for you to make the EMI payment and you could end up as a defaulter. This will bring down your credit score. Hence, apply for icici personal loan only when you think you will be able to make the repayment on time. If you have an outstanding loan, repay it, and then apply for a new loan.

Your credit score is a report card for your credit status. It shows whether you are a high-risk borrower or not. Long credit history makes it easier for the lenders to decide about offering you a loan. If you do not have a credit score, the lender will consider other factors like your age, job stability, and income to estimate your creditworthiness. If you have never had a loan, this is the best time to apply for one and build a healthy credit score. Your first loan will be a clean slate, and you will be able to build an excellent rating with the timely payment of outstanding dues.