Do you need a loan to pay for a trip or an unexpected medical expense? A personal loan can meet your demands for any purpose. But since a personal loan is an unsecured loan, you must first fulfill the requirements for qualifying. Your credit score is important for personal loans, among other things. Your eligibility for a personal loan and the interest rate you will pay on it can be determined by your credit score. So let's examine what a credit score is, why it matters for personal loans, and how to raise it using this explanation.

A credit score: what is it?

A credit score is a numerical summary of three numbers that represents a person's credit history. It serves as a gauge of a person's creditworthiness. Credit bureaus that are registered with the RBI, including TransUnion, CIBIL, CRIF High Mark, Equifax, and Experian, provide credit scores. A person's TransUnion CIBIL credit score, for instance, varies from 300 to 900.

In what ways does credit score affect personal loans?

There are two categories of loans: secured and unsecured. A security or collateral serves as the guarantee for a secured loan. Home loans, auto loans, gold loans, and so on are all considered secured loans since they are supported by collateral. There is no security or collateral for an unsecured loan. Examples of unsecured loans include credit cards and personal loans.

The bank or NBFC providing the loan mostly depends on the borrower's creditworthiness and ability to repay because a personal loan is an unsecured loan. The credit score enters the picture at this point. The financial institution evaluates your credit score to ascertain whether to move forward with your personal loan application based on its understanding of your past credit behaviour.

“If repairing one's credit is as easy as sending some dispute letters to the credit bureaus then why doesn't everyone have good credit?” ― Tyler Gregory, Chief Executive Officer, JCRC Bay Area.

The banking company uses your credit score to determine

Loan eligibility: A 750 credit score on CIBIL is deemed healthy by the majority of banks and NBFCs. Financial organizations may determine the qualifying requirements for a personal loan by using a predetermined credit score as a cut-off. Therefore, your application for a personal loan may be denied if your credit score is lower than the predetermined amount.

Let's say the credit score is higher than the given figure. In addition to the credit score, the financial institution may consider other factors including income, occupation, city, debt-to-income ratio, etc. Therefore, you ought to always strive to raise your credit score. If you already have a high credit score, you ought to strive to keep it that way.

If your credit is high enough, you can apply for personal loans. Please be aware, though, that your credit score is a necessary but not the only need for being eligible for a personal loan. To be eligible for a personal loan, one must meet additional requirements in addition to having a high credit score.

Interest rate: We covered in the last section how most lenders view a 750 CIBIL score as good for a personal loan. The better, the higher the credit score. The financial institution could provide you the advantage of a cheaper interest rate on personal loans than other borrowers if your credit score is higher than a predetermined threshold. For instance, the financial institution can offer you a 0.25% or 0.50% reduced interest rate on the personal loan if your CIBIL score is 800 or higher. Financial institutions vary in this regard; some might not reduce the interest rate despite a higher credit score.

How can your credit score be raised?

As we showed in the last section, having a high credit score can help you get approved for a personal loan and may also result in a reduced interest rate. Consequently, you can raise your credit score by doing the following actions.

Repayment on schedule: Make sure you always pay your credit card bills and current loan EMIs on time each month. By doing that, you are demonstrating to lenders that you are a trustworthy borrower who makes your loan payments on schedule. When it comes to the factors taken into account to determine your credit score, timely repayment has the biggest weight. Repayments over time will therefore raise your credit score.

Reduced credit utilization ratio: This measures the amount of credit you are utilizing out of your available credit. Assume, for instance, that you have a credit card with a Rs. 1 lakh credit limit and that you have used Rs. 10,000 of it. That indicates a 10% credit usage ratio for you.

For a decent credit score, you should keep your credit usage percentage at 30% or less. Your credit score will rise more quickly if your credit utilization ratio is lower.

Prevent applying for too many credit cards or loans in a short amount of time: You should refrain from applying for too many credit cards or loans in a short amount of time. Such activity lowers your credit score and demonstrates your voracious appetite for credit. You should apply for loans or credit cards with enough time between them in order to keep your credit score high.

A balanced combination of unsecured and secured loans: You should balance your secured (home, automobile, gold, or other loans against any security) and unsecured (credit card, personal, education, etc.) loans in order to keep your credit score high.

Having a healthy balance of both secured and unsecured loans helps raise your credit score.

Keep open old credit cards: Your credit score is influenced by the length of a loan and the duration of credit card ownership. The longer the duration of your current loan or the longer you have used a credit card, the more positively it affects your credit score.

For instance, a person's credit score will rise if they have been making their home loan EMI payments on time for the past ten or fifteen years. In the same way, even if you don't need your lifetime free (LTF) credit card, don't close it. Simply keep it active by making a little transaction every several months. The better the card's contribution to your credit score improvement.

The Key to Qualifying for a Personal Loan is having a High Credit Score

When applying for a personal loan, you are not required to tell the financial institution how you plan to use the funds. Therefore, you may rely on a personal loan whether you need money for an unexpected medical expense or to take your family on a trip. On the other hand, when you apply for a personal loan, make sure you consistently keep a high credit score. If you have a low credit score, try to raise it. If your credit score is already high, try to keep it that way or raise it even higher. To be eligible for a personal loan and possibly even to receive a lower interest rate, you must have a high credit score.