A credit score is a deciding factor when it comes to building or breaking a lender’s trust in a borrower. There are many credit rating agencies in India that are responsible for generating credit scores of individuals and businesses as per the data provided by banks and lending institutions.
Credit score allows borrowers to access credit products, such as loans and credit cards. A good credit score allows easy access to credit whereas a low credit score may make it difficult for an individual or business to access credit when needed.
So, what is a good credit score? How do banks and lenders determine good credit scores? Here is everything you need to know about a good credit score.
What is a good credit score?
A good credit score is one that ranges between 700 and 900. A good credit score attracts many benefits such as faster loan approval, low-interest credit facility, higher loan amount, flexible repayment period, to name a few. Additionally, multiple banks and lenders may be willing to approve a loan application with a good credit score. This allows the borrower to choose from among many available lending options.
How much credit score is required for loans?
A good credit score for loans is the same as any other credit, which is anything between 700 and 900. A good score ensures higher chances of loan application approval.
Whether it is a personal loan application or car loan or a home loan, a credit score of above 700 is preferred. Applicants can get a good deal with a lower interest rate, flexible repayment period and also higher loan amount with a good credit score.
Additionally, a good score ensures a quicker and more smooth documentation process. With regards to a home loan, one can expect a loan of up to 80% of the total cost of the property if the credit score is between 700 and 900.
However, this may not necessarily apply to personal loans since these are unsecured loans. In personal loan applications, the loan amount may differ depending on the purpose of the loan as quoted during the application and the credit score.
For car loans, there is no specific score requirement for qualifying, however, it is recommended to have a credit score above 700 to ensure that the application does not get rejected.
What factors affect credit score?
Many times, borrowers are unaware of the impact of their actions on their credit score. Here are a few actions that directly impact credit score and increase the chances of a lower score:
- Late Payment – Even a single late payment that is made after the due date can negatively impact your credit score. Sometimes, you may ignore the repayment and use the debt for meeting emergency expense needs. However, such delays in payments can create the impression that you are an irresponsible borrower and are unable to handle your finances well. This immediately impacts your credit score and reduces the chances of future borrowings.
- High Credit Utilisation – Lenders usually set a credit limit for every credit card user after taking into account his/her income and the debt-service ratio. The credit limit defines the amount of money that one can spend per month on a credit card. If a borrower regularly utilises more than 50% of the available credit limit, the credit score can be negatively impacted. It is an indication that the borrower is not good at managing finances. To maintain a good credit score, one must make sure to keep the expenses within 50% of the available credit limit.
- Multiple Credit Card Applications – If you have an emergency cash requirement and have applied for some form of credit with multiple lenders within a short duration, it will reflect desperation on your part. This is because each credit inquiry gets reported by lenders to credit rating agencies. These are recorded in your credit report and may lead to a lower credit score. Multiple credit applications and enquiries reflect that you are credit hungry and that you may not be able to handle the repayment easily.
Additional Reading: What Are the Factors That Affect Your Credit Score?
As per the latest credit scoring algorithms, a long-term trend of outstanding loan balances, the ratio of repayment to loans outstanding, credit card transaction history, and the total number of credit accounts opened and closed within the period are some of the factors that are focused upon while arriving at the credit score.
An aspiring applicant must look through their credit report before making a loan or credit card application. It is important to check if they stand a good chance of getting the credit facility without rejection. Although bad credit loans exist, it is still best to manage your finances and pay debts promptly for wider funding options when the need arises. If the credit score is low, one must try and improve it before applying for credit with a bank or lender.