Wondering why your Personal Loan application got rejected? Have a look at your credit score. The credit score is the most critical figure that determines how big an amount can be given to you as a loan and what will be the rate of interest charged on it. A good credit score means that the lenders will willingly offer you loan as per your requirement.
How is a credit score calculated?
The following factors determine the credit score which generally ranges between 300 and 900:
- If you pay your bills on time?
- What is your utilisation ratio -the total sum of credit you already have taken from any organisation?
- How many types of loans have you already utilised?
- The average age of your accounts, i.e., for how many years you have been running them?
- How many new accounts or loans have you requested?
How can you know your credit score?
Credit score shows how responsible you are for returning the amount and making the due payments. For calculating your credit score, you can choose any of the following measures:
- Check it with your lender or Credit Card issuer
- Visit a free credit score telling the website
- Buy your credit report from the regulating agencies
- Visit a non-profit counselor
Once you know your credit score, you can analyse your eligibility for getting a loan. People apply for Personal Loans to pay off other debts, manage unexpected expenses, to purchase big-ticket items, home furnishings, wedding, vacations, and whatnot. The rate of people taking personal loans has increased substantially owing to the low rate of interest offered to individuals having a good credit score.
There are two types of Personal Loans – secured, backed by collateral and unsecured, not supported by guarantees. For loans which do not require security, a hard inquiry is made by the organisation to check if you repaid former loans or not. This can cause a fall in your credit score; hence, one must avoid applying for a Personal Loan at too many banks at the same time.
Your credit score not only exerts an influence on the interest rates offered to you but also affects the charges you pay as the processing fee or pre-payment penalty. It is going to add cost to your overall amount if the credit score is low and can reduce the same if the score is high.
How much does your credit score affect the rate of interest?
The rate of interest generally advertised by the lenders is the lowest rate they offer to people with good credit score.The amount charged from the riskier borrower is very different and far more expensive. People with a credit score of 750 will get a different rate of interest than people with only 620 points. The difference created by 10 or 20 points can make a variation of 25 basis points on interest charged, or even more. A perfect credit score – 850 points – makes you eligible for all the benefits the bank offers.
How important is the credit score to get a loan?
Although there is no rule that you cannot get the loan if your credit score is low, the rate of interest charged will undoubtedly increase. Banks do not refrain from approving your loan application just because your credit score is low. It is an important factor for the decision, but not the only factor that matters. On an average, people having a score of fewer than 600 points will not get their applications approved easily. However, they can look for options like secured loans or organisations that are willing to take the risk.
How to improve the credit score?
A credit score is a meter that ranks you on the ground of creditworthiness. One must engage in activities which boost this score, so when you need a debt, your loan application not only holds high chances of being approved but the extra amount you pay as interest is the minimum. You can quickly increase your credit scores by following a couple of methods.
- Pay off your existing debts
- Consider purchasing a Credit Card
- Become an authorised user on a person’s Credit Card who has a good credit score.
It is advised to check your credit score before you apply for a Personal Loan. This would give you an idea of your probabilities of getting the loan and also will buy you some time to improve your score if it is not good enough.