When you apply for a personal loan, one of the most crucial factors that come into play is your credit score. Since personal loan is an unsecured loan, your lender relies on your salary and your credit score to determine your repayment capability. The lenders are exposed to high risk as they do not have any means to recover the money in case of defaults. That’s why they rely on your credit score and your current monthly income to analyse your repayment tendency and capability.
A good credit score assures that you are a responsible borrower and that you have always made your payments on time. While a poor credit score exposes the lender to high risk of loan defaults. They may even have to inform the collection team to recollect the missed EMIs. There is also a slight risk of losing out on the loan money if you opt for loan settlement.
The lender might reject your loan application if have a poor credit score or they may offer you the loan at a very high interest rate. A healthy credit score makes you eligible for the best loan deals. You can also negotiate a lower interest rate on the instant loan.
That’s why, it is very important for you to maintain a good credit score at all times. But to do that, you must know the factors that affect your credit score.
What are the Factors that affect your Credit Score?
Your credit score is a reflection of your financial stability and credit management practices. Here are the top 5 factors that have an impact on your credit score:
- Your payment history
Your payment history contains crucial information like missing out on your loan EMIs, or failing to pay your EMI payments on time. Your credit score lowers each time you make a late payment, even if it’s just by one day. Missing out on your loan EMIs also impacts your credit score.
Your credit report and credit score can be seriously harmed by public records like charge-offs, loan settlements, bankruptcies, foreclosures, litigation, wage withholdings or attachments, liens, or public judgments.
- Credit history’s duration
The average age of all the accounts is calculated by dividing the age of your oldest account by the age of each of your newer accounts. A long credit history might make it easier for potential lenders to understand your history of financial stability and good credit management.
But be cautious to avoid having late payments or other bad marks on your credit history. A little credit history won’t hurt you as long as you make all of your timely payments. You can have a number of loan accounts taken for short tenures, but make sure to limit the number of debts you opt for during a single tenure.
- Credit Utilization Ratio
The credit usage ratio demonstrates your level of debt about your credit limitations. Therefore, a lower credit use ratio is preferable. Try to keep your credit utilization ratio under 30%. But don’t automatically believe that having no loan is always preferable. To convince lenders that you are trustworthy and have the resources to repay an instant loan, you should utilize your credit a little amount and make your timely payments.
To keep your credit utilization below 30% you must opt for a credit card that offers you a higher limit. Also, if your credit card usage exceeds 30%, then make sure to make the repayment before the billing cycle. This way the report of exceeding the limit won’t reach your credit bureau.
- When you apply for a new loan
Your credit score is impacted by how many loan accounts you have. Your credit report contains details such as the number of new accounts you have lately applied for and the dates of your most recent debt accounts.
A hard inquiry is made by lenders to examine your credit report. Your credit score can temporarily decrease slightly as a result of the aggressive queries. As it’s considered that you have a lot of credit accounts and that you might be a bigger credit risk.
- Credit mix
The many types of loans you have access to, including credit cards, retail accounts, installment loans, mortgages, etc., have a significant influence in determining your credit score. The total number of accounts you have is taken into account when determining your credit score.
Ideally, you should have a good mix of secured and unsecured loans. Lenders consider you a responsible borrower who makes thoughtful financial decisions. You should also have one or two credit cards. But be careful to not opt for many debt accounts at once.
Conclusion
Every time you apply for a new credit, such as an instant loan, your lender runs a credit report on you. Your chances of quickly obtaining a loan will significantly decline if your credit score is low.
Good credit score makes you a highly eligible customer for personal loans. Lenders are open to offer you the loan at lower loan interest rates and better loan features. You can negotiate with the lender on the processing fees and other fees and they may be open to waive off the fees.
