How Your Credit score impacts your loan?
The credit score and loan are related in a very delicate manner. Both loan and Cibil score equally impact each other.
- If you have a low credit score, then no lender will sanction your loan.
- A good credit score assures the lenders that you will repay the loan, which in result helps in getting the loan.
- Bad credit history will partially thwart your chances of getting a loan sanctioned, therefore, to get a loan approved easily, you must have an appreciable credit history.
Just like this, loans also affect the credit score equally.
- Timely loan payments increase the credit score.
- High loan balances hurt the credit score.
- A number of loan applications also negatively impacts your credit score.
The credit score is considered as one of the primary components to avail loans. Therefore, a favorable credit score is preferred by all loan providers and lenders because a good credit score shows your creditworthiness.
Some of the significant factors that can affect your CIBIL score negatively:
- Irresponsible Payment Behaviour:
Your payment history has the most significant influence on your score. It is important to pay your credit card bills and loan EMIs on time every month. As per a CIBIL analysis (reported by the Financial Express), a 30-day delinquency can reduce your score by 100 points. If you have multiple credit cards as well as loans, it is advised to set up reminders and alerts, to avoid missing payments or delaying them. Any missed or overdue payments reflect poorly on your score and suggest that you are not consistent with repaying credit.
- High Credit Utilisation Ratio:
One of the golden rules you should follow is to keep an eye on your credit utilization ratio. It is the amount of credit used in proportion to the credit limit that is available to you. According to experts, you should ideally not exceed using 30% of your credit limit. If you have used over 50% of your credit limit, it can harm your credit score. Having a high credit exposure will send a red flag to lenders as it indicates you are at a higher risk of becoming a defaulter.
- Outstanding Debt:
You should always make sure to clear off your outstanding debts. When you have unpaid dues reflected on your credit report, it takes a toll on your score. It is advised to pay off all the outstanding dues even if the amount is small.
- Paying only the Minimum Amount Due:
You may fall into a debt trap if you continuously pay only the minimum amount due. Rolling over the debt by paying only the minimum amount leads to the interest compounding on your outstanding balance. So, it is advised to pay your credit card bills in full. It also reflects poor repayment behavior.
- Not Having a Credit Mix:
It is crucial to maintain a healthy balance of secured and unsecured loans. Home loans and auto loans are examples of secured loans while a credit card is an example of an unsecured loan. If you have a high number of only one type of credit, it can affect your score. Also, when you have a healthy mix of different types of loans, it suggests that you have experience in handling both different types of loans. It is considered desirable by lenders.
- Length of Credit History:
In simple terms, credit history means the total number of years that have passed since you have first opened a credit account. If you have a long credit history, it helps lenders take a sound decision at the time of offering you credit. It is better to focus on building a credit history in the earlier stages of life, by the time you apply for a home or car loan, you will have a good record of credit transactions.
- Closing old Credit Card Accounts:
Credit cards are a great tool to build a credit history. However, when you close your old accounts, you end up losing a long credit history associated with it. Therefore, if you have used the card for a substantial number of years, it is advised to keep it open as long as possible, if feasible. Consider closing a relatively new card.
Benefits of Having a High CIBIL score
- Quicker approval for loans and credit cards
- Cheaper interest rates on loans
- Better deals on credit cards
- Credit cards with a higher credit limit
- Discount on processing fee and other charges for loan applications
Also, it is essential to check your CIBIL score from time to time. Make sure your score is above 750 to enjoy better access to credit products. You are entitled to receive one detailed credit report for free from CIBIL per the calendar year.