How does your credit score affect your application for a personal loan?

As you search the market for a good personal loan deal, you will find that there are several financial instruments that either cater specifically to your end-use or your eligibility. For instance, there are personal loans for travel and personal loans for those who have a certain salary. Many financial institutions also offer pre-approved loans for existing or past customers that need only minimal documentation and process your application in less than 24 hours. However, almost all of these loans are approved after checking your credit score.

Your credit score, or CIBIL score, informs lenders of your credit history. It is a numerical expression of your credit health, calculated based on existing and prior debts. This number ranges from 300 to 900 with a higher score pointing to the reliability, experience with credit management, and good credit behaviour. The ideal CIBIL score for personal loan borrowers is usually pegged at 750 and above.

Lenders check your CIBIL score during personal loan applications, irrespective of the amount you are seeking to borrow or your income bracket. This is why it is important to maintain a high credit score. Here's more on why your CIBIL score matters when it comes to taking a personal loan and how you can improve it to get affordable terms.

How your credit score affects your personal loan eligibility

Lenders often reject personal loan applications if they demonstrate a low credit score, simply because they pose a high risk of non-repayment. A high credit score, on the other hand, convinces lenders that you are more likely to pay back your loan on time and in full. What's more, when lenders see a high CIBIL score of personal loan applicants, they are more likely to offer competitive interest rates, favourable loan tenors and higher loan amounts.

How to check CIBIL score

There are several methods that you can use to check your CIBIL score online, even if you are unsure how to read credit reports correctly. One option is to get your credit score for free from CIBIL. Once you create an account, add your personal information and ID number and verify yourself with an OTP, you can see your credit score and access your credit report. However, this service is available for free only once a year. Another way to check your CIBIL score free of cost is via Bajaj Finserv. The process follows similar steps and gives you not only your CIBIL score and report but also loan deals that are personalised for your credit profile. Checking your score in both these ways does not impact your credit score, so you can do this with confidence when applying for a personal loan.

How to read credit report correctly

Once you've learnt how to check CIBIL score and get both your score and report, read your credit report correctly. This is easy to do when you understand that this report is divided into six parts: your CIBIL score, personal information, contact details, employment data, account information, and enquiry information. The last two sections are crucial as they reveal your past and current credit information (going back to the past 3 years), as well as lenders, have ever requested your credit details.

What impacts your credit score

Your credit score is built on various factors including:
1. Your history with repayment, including loan EMIs, defaults and credit card bills
2. Your experience with loans and credit cards, which reflects whether you have borrowed a mix of credit such as collateral-free and secured loans.
3. Your credit utilisation, which takes into account how much of your income is being used to repay debt and how much debt you are using in comparison to your income.
4. The credit enquiries that you have on your credit report, which indicate whether you have been acting in a credit-hungry manner or have too much debt to repay at present. Remember, each time you apply for a loan, a lender conducts a hard enquiry into your credit score, which decreases your score slightly.

How to raise your credit score

If you're looking to raise your CIBIL score for personal loan applications, make all your existing EMI payments on time and in full. The more you demonstrate good loan repayment discipline, the higher your score will be. A good credit mix of both secured and unsecured loans indicates sensible financial management and also boosts your score. Another noteworthy pointer is to be cautious about applying for credit. Do so only if you meet the eligibility criteria and don't spend more than 50% of your income on debt. Lastly, keep your credit utilisation to 30%, which means use less than one third of your credit card's limit.

With a good credit score, you can apply for affordable and efficient credit facilities such as the Bajaj Finserv Personal Loan, which requires minimal documentation and offers quick approval. Check your pre-approved offer and avail of up to Rs.25 lakh, which you can repay over a flexible term of up to 5 years. Apply now and benefit from transparent fees and charges and a competitive interest rate too.