Credit score is a number lenders use to determine the loan applicant’s creditworthiness and the risk of lending them money. Therefore, it is a critical factor determining whether your loan application will be rejected or approved. Remember, the credit score is not fixed, and it fluctuates in response to your credit activities. Lenders check your credit score before making their final decision. So, what score is good enough to get approval when you apply for a loan ? Read on to find out.
How is Credit Score Calculated?
Credit bureaus receive information about your credit behaviour from your lenders, based on which they calculate your credit score. Each and every credit-related activity you do is recorded in your credit report. The more responsible you are towards your credit, the higher will be your credit score. There are several factors that lenders look at while determining your credit score. These include your payment history, owed amount, lengthy credit history, types of credit used, new credit details, and others.
What is the Minimum Score You Need to Qualify for a Loan?
Although there is no official number that guarantees loan approval, lenders take several factors into account while determining your loan eligibility. For instance, you may get loan approval if you have a low income but a high credit score. To approve your loan application, lenders want to ensure a low debt load and a solid repayment history. However, the credit score is just one piece of the puzzle and does not guarantee loan approval.
What do Lenders Want to See?
Since there are four credit bureaus in India, your credit score from each bureau may be different from the other. Therefore, you must know which bureau your prospective lender uses to check your credit score. For instance, if you apply for a loan from Clix Capital, you must have an Experian credit score of 630 or above to get your loan approved. These are the ranges in which your credit score may fall:
The closer your credit score is to 900, the higher will be your loan eligibility. However, several other factors play a crucial role in determining your loan approval, such as your income, debt-to-income ratio, employment, age, and many others. Go through the lender’s eligibility criteria before filling out the loan application form.
Factors Affecting Your Credit Score
It is crucial to know which factors determine your credit score. These are five of them:
1. Repayment History: When a lender lends you a loan, they are most concerned about timely repayment. Your repayment history has a significant role to play in your credit score, as it helps a lender determine whether they can trust you for loan repayment or not. To make their final decision, they want to check if you pay your existing loan EMIs and credit card bills in time, how late you make your payments, do you need any collections, or have you any existing debt settlements, foreclosures, bankruptcies, or charge-offs.
2. Owed Amount: Lenders do not prefer borrowers who are already under heavy debt. If you are already paying hefty EMIs for other loans, you may have difficulty managing additional loan they grant you. That is why they check your debt-to-income ratio and expect it to be less than 30-40%.
3. Credit History Length: Lenders generally prefer borrowers who have been managing credit responsibly for a long time. To determine your credit history length, they find the age of your oldest account and calculate all your accounts’ median age. The more extended history you have, the easier it would be to apply for a loan. However, ensure that your credit history does not have too many negative remarks.
4. New Loan Applications: Lenders want to see your credit activities in the recent past. If you have recently applied for several loans, they may perceive you as a credit-hungry borrower struggling to keep up with the finances. Whenever you apply for a loan, it pulls a hard enquiry on your credit report, which reduces your credit score by a few points. Too many hard enquiries within a short period can decrease your credit score noticeably, and the lender may lose trust in your credibility.
5. Credit Mix: The types of credit you have been handling so far also play a major role in determining your credit score. Lenders want to see if you can handle different types of financial products responsibly. Therefore, you can diversify your credit portfolio by taking different types of loans, such as short-term, long-term, secured, and unsecured loans.
Tips to Improve Your Credit Score
While there is no specific formula to boost your credit rating, you need to develop responsible credit habits to improve your creditworthiness. Some ways to improve your credit score are:
- First and foremost, check your credit report and ensure that it is error-free. If you find any errors in it, dispute them with the credit bureau and have them corrected. Some errors might be holding your credit score down, and having them fixed may instantly boost your credit rating.
- Stay consistent with EMI and credit card bill payments. Never miss or delay them. If possible, activate e-mandate to get them paid automatically from your bank account.
- You must have a credit limit with your credit cards and other credit products. Do not use more than 30-40% of your available credit on average. Lenders expect a low credit utilisation ratio to trust you for a loan.
- Diversify your credit portfolio with different types of loans and other credit products. Lenders want to see that you can handle different types of credit responsibly.
- Compare lenders carefully and apply for a loan from the one that best suits your requirements or eligibility status. Avoid making multiple loan applications simultaneously.
At Clix Capital, you can check your credit score for free. The higher your score is, the more eligible you are to get loan approval. Use the tips mentioned above to boost your credit rating and apply for a loan with better terms and conditions.