Credit Score: An Essential Practice Before Applying for Loan
Your credit score is determined by the Cibil score, a three-digit numerical score based on your credit history, which includes loan and credit repayments.
The issue about loans is that, as a first step, you must be very confident that you will be able to repay them on time. Therefore, taking out a loan is a carefully calculated choice. A person typically takes out a loan to fulfil his or her obligations or fulfil his or her aspirations, which call for a larger investment. However, there are requirements you must meet before any bank will provide you a loan.
In order to achieve that, you must have a high credit score. Your capacity to repay the loan amount plus interest on time is determined by your credit score. So, before submitting a loan application, it is imperative to check your credit score. Read ahead to learn more about your credit score and how you can check it before applying for a loan.
What is a Credit Score?
The Credit Information Bureau (India) Ltd., which has been granted authorization by the Reserve Bank of India, is a credit information agency that offers credit information to businesses, banks, NBFCs, and private citizens alike. TransUnion includes Cibil Ltd. Apart from CIBIL, there are other agencies in India that enable you to know your credit scores.
Your credit score is determined by the Cibil score, a three-digit numerical score based on your credit history, which includes loan and credit repayments. According to the credit bureau, a credit score can vary from three hundred and eight hundred fifty or nine hundred. Your credit score is seen more favourably if it falls on the higher end of the ranking order.
Factors Affecting Credit Score
There are various factors that can influence your credit score. It can either have a positive impact or a negative impact on your credit score. Let’s have a look at them separately:
Factors that Have a Positive Impact:
- If you are someone who uses credit cards, then paying credit card bills on time can help increase your credit score.
- If you made any purchase on EMI, then timely repayment of EMIs will work in your favour.
- If you have the habit of clearing your complete outstanding balance and not simply the minimum payable balance, then it will help increase your credit score.
Factors that Have a Negative Impact:
- Are you in the habit of lazily making late payments towards your EMI’s and credit card bill? If so, then you are lowering your credit score.
- It is true credit cards are amazing payment methods. However, using it over the 75% limit or crossing the credit limit decreases your credit score.
- Owning too many unreliable credit cards
- Paying the minimum due balance instead of clearing the entire bill.
How Does Your Credit Score Affect Your Loan Application?
Checking your credit score before applying for a loan is an essential practice because it affects your loan application to a great extent. Let’s have a look at them:
Role of Credit Score in Loan: It is true that when you are applying for a loan your job, salary etc. play a vital role. However, credit score is what determines if you will be granted a loan by the lenders. Hence, it plays a very significant role in loan applications.
Repayment History: Your repayment habits and history is a matter of scrutiny for banks or other financial institutions. Thus, in case you have had a good record of making payment in a timely manner towards your debts and bills then you can get clearance on your loan application. You can use a financial calculator to check your credit score online.
What About a Low or No Credit Score?: In such a case you will have a longer waiting period in which the bank or any other financial institution that you are applying through, will conduct a more in depth check of your creditworthiness. To check if you have a low credit score you can use a financial calculator.
Helps in Avoiding Errors in Credit Reports: It is advised to check your credit score before submitting a loan application to lenders since there can be errors while generating your credit score report. Thus, it is recommended to get your scores beforehand and review them carefully before submitting it for a loan.
Now that you are aware of how crucial your credit scores are to obtaining a loan, it is advised that you first obtain your credit scores before submitting a loan application. Additionally, it is advised that you keep an eye out for anything that could negatively affect your credit scores and promote a mindset that will help your credit score improve. Please take note that you can access your credit reports online using tools like a financial calculator. Due to the aforementioned factors, it is hoped that you strive toward improving your credit score and meet your goals in time.
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