Rohan recently checked his credit score and to his dismay the number was nowhere near what he had hoped it would be. This threw a wrench in his future plans as he would need a much better credit score to get other long-term loans to finish his higher education and to buy a home.
Just like a number of other millennials, Rohan had a few credit cards that he used regularly to pay for everything from shopping sprees to monthly groceries. He was only paying off the minimum amount due to continue using his credit cards. This is when Rohan realized how necessary it was for him to find a way to consolidate his debts and pay-off all the high interest debt. His father came to his rescue and explained how he could resolve this situation by taking a
personal loan and improving his credit score in the process.
Here are a few things Rohan learned from his father about how taking a
personal loan might help him improve his credit score. To help you benefit from this wisdom, Rohan has compiled a handy guide for your reference.
What is a Credit Score?
A credit score is a three-digit numerical value that indicates your creditworthiness, based on your credit history. The score ranges from 300 to 900, with 300 being the lowest and 900 being the best you can get. If your credit score for personal loan is higher, you can avail funds on favourable terms.
Credit score is calculated on numerous criteria, but the following factors affect it the most:
Credit payment history:
Your debt repayment history accounts for a significant portion of your overall credit score. In case you fail to make your equated monthly instalment (EMI) payments on time, even if your reasons are legitimate, it will appear on your credit report. This report informs the lender of your previous EMI payment diligence. Thus, even a single delayed EMI payment will have a negative impact on your profile and lower your credit score.
Credit payment history makes up around 35% of your personal loan credit score.
Some important points related to credit payment history are as follows:
- In the event of late payment, the lender will enquire as to how recently you have settled the missed EMI. Delays of more than 90 days will lower your credit score more severely than those of less than 30 days.
- When gauging your payment history, credit bureaus also consider any foreclosures, loan-related lawsuits, bankruptcies, liens, etc. in your financial records.
Credit utilisation:
The percentage of the amount you utilise from the revolving credit line has an impact on your credit score. Assume you have two credit cards, each with a Rs 1 lakh limit. If you spend more than Rs 30,000 on each card, your credit score will suffer.
Credit mix - Types of loans availed:
You have probably seen various financial experts with a well-diversified portfolio, whether it's investment or debt. People with a credit mix are viewed as disciplined borrowers by credit bureaus. Assume you qualify for a Rs 5 lakh personal loan and you need Rs 4 lakhs to decorate your home and pay for your child's education. With the remaining funds, you intend to purchase your dream motorcycle. In this case, even if a personal loan meets your needs, you should still consider purchasing a bike with a two-wheeler loan. This will aid in the development of a credit mix. Credit mix accounts for around 10% of your overall score.
Length of the credit period:
It is usually recommended to go for a longer repayment term, even if it means paying extra in interest. If you do this and pay all your bills on time within the loan’s tenure, the lender will have enough credit history to assess your repayment potential. The length of your credit period accounts for around 15% of your credit score. This credit period length is calculated based on the older and newer loan account tenure.
New Credit:
New credits are subject to hard enquiries. When you apply for a new loan, information such as how many loans you have applied for recently and what is the time gap between each new account is recorded on your credit report. It happens because every time you submit an application for a new loan, your lender will conduct a thorough credit check on your profile.
A soft enquiry is when the lender conducts a credit check to determine your eligibility for a pre-approved loan. Soft enquiries do not have an impact on your credit worthiness.
Remember that hard enquiries account for around 10% of your overall credit score.
For financial institutions, credit score acts as a measure to evaluate potential risks involved in lending money to customers. It also aids in fixing the terms and interest rate of the loan.
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