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Checking These 5 Things Before Applying for Loan Can Protect Your Credit Score

Clix August 31, 2021


Whether you are planning to buy a home, expand your business, or need funds to cover expenses for your vacation, wedding, home renovation, education, medical emergency, or debt consolidation, applying for a loan makes sense. However, you should not take your decision in a hurry, as taking a loan is a financial commitment that may make or break your creditworthiness. The last thing you would want is to get your loan application rejected, as it will not only waste your time but also reduce your credit score.

If you are planning to apply for a loan, think again! These are five crucial things you must check before applying for a loan, so that you do not harm your credit score afterwards.

1.    Credit Score

Most lenders ask for a minimum credit score of 725 or above to approve your loan application. A high credit score implies that you have been consistent with your loan EMIs and credit card bills in the past and have responsible credit behaviour. As a result, lenders perceive you as a low-risk borrower and give you a loan offer with a higher loan amount and lower interest rates. However, if your credit score is lower than 725, you should wait until you achieve that threshold. If you apply with a low credit score, you will only end up having your loan rejected, further reducing your score.

There are ways to increase your credit score over time. Till then, you should keep your loan application on hold. Some ways to improve credit score include:

    • Staying consistent with loan EMIs and credit card bills
    • Diversifying your credit profile with secured, unsecured, short-term, and long-term loans
    • Keeping credit utilisation ratio low
    • Reducing debt-to-income ratio
    • Prolonging your credit history

Following these tips may help you improve your credit score over time. Check online credit score once a month and apply for a loan only when you achieve your lender’s minimum requirement.

2.    Loan Eligibility

You must check the lender’s eligibility requirements carefully and apply for their loan only if you fulfil them completely. If you are not eligible for their loan and apply for it, you will not only face loan rejection but also reduce your credit score. When you apply for a loan, the lenders conduct a credit score check and pull your credit report to determine your creditworthiness. Each pull results in a hard inquiry which reduces some points from your credit score. As a result, if you apply for a loan that you are not eligible for, you reduce your credit score without getting your loan approved.

For instance, if you are applying for a personal loan from Clix Capital, you need to fulfil the following conditions:

    • You should be 25 to 58 years of age
    • You must be a citizen of India
    • You should be a salaried individual drawing a salary of at least ₹ 25,000 every month
    • You should be working with your current job for at least 6 months, and you should have a total work experience of at least 12 months

If you do not fulfil any of these eligibility conditions, it’s better to improve your eligibility and then apply for a loan with a better standing. A hard inquiry is inevitable but you should ensure that you will at least get your loan approval to compensate that. With regular payments, you can improve your credit score over time. However, if your loan gets rejected, you will end up with a low credit score without any chance to improve it.

3.    Errors in Your Credit Report

Sometimes, your low credit score might be due to errors in your credit report. That is why experts advise checking online credit score from time to time. If you notice a dip in your credit score for any unexpected reason, request your credit report and study it thoroughly to identify any errors. If you see any, bring them to your lender’s and the credit bureau’s notice and dispute them.

Wait for your loan application until these errors are removed from your report. Once the errors are removed, you will see an improvement in your credit score, after which you get better chances of loan approval with higher loan amount and lower interest rates. So, waiting for a few months will be worth it.

4.    Your DTI Ratio

DTI refers to Debt-to-Income ratio that measures monthly debts in relation to your income. If your DTI ratio is very high, the lender may perceive your finances as already over-extended and may deny your loan application. Therefore, pay off your existing debts first to lower your DTI ratio and then apply for a loan with higher chances of approval. Individuals with a low DTI ratio are also likely to get a higher loan amount with lower interest rates. So, waiting for some time to reduce your DTI ratio will protect your credit score from dipping down.

5.    Your Savings for the Down Payment

If you are applying for a home loan, you will need to pay a small percentage of the property’s price from your savings. The rest of the cost is  paid by your home loan lender. The higher the down payment you make, the lower the loan amount you will need to take and the lower the interest you will need to pay. So, if you have not yet saved enough to make a high down payment, wait for a couple of more years to save enough and then apply for a home loan. Taking more than required will not only cost more but will also increase your chances of loan rejection, thereby leading to reduced credit score.

When you apply for a loan with low eligibility, you stand high chance of loan rejection. Not only this, the hard inquiry that the lender makes on your credit report will also reduce your credit score. So, to protect your score, check these five things, improve your eligibility, and then apply with assured chances of approval.

Clix Capital is a reputed NBFC offering home loans, business loans, and personal loans at competitive interest rates. Improve your eligibility and get a credit score of 725 or above to get approval with easy terms and conditions.

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