Why A Good Credit Score Is Important For Personal Loan

Before getting to know more about credit scores and their impact on a personal loan. Let's get to know more about what a credit score is.

What is a credit score ?

A three-digit number that determines your creditworthiness is known as a credit score. Your credit score will determine the chances of getting your application approved.

A high credit score will help you to get your personal loan application approved quickly. Whereas a low credit score can either lead to rejection of your application or you'll be charged with a high interest rate. Your credit report will show how you manage your expenses, credit, and loans.

Reasons to maintain a good credit score :- Your current and previous debts, loans, and credit together make up your credit score. It will determine how creditworthy you are. So we've mentioned some points on how a credit score can affect your loan.

Your credit score will affect your application approval :- Personal Loan is an unsecured loan, so a lot of banks have a credit score as their primary eligibility criteria. Your credit score will determine whether or not your application should be approved. An excellent credit score above 750 can quickly get your application processed.

The credit score will also affect the interest rate applied by the bank :- A lot of factors in the personal loan is affected by your credit score. The credit score will determine an individual's credibility. So if your credit score is high then it'll be easier for banks to trust you according to your past loan repayment, and then will charge you with a low interest rate. However, if your credit score is low then banks either reject your application or you'll be charged a high interest rate and other charges.

You can get extra facilities and services with a decent credit score :- Having a good/excellent credit score can help you in many ways. A lot of banks give extra facilities and services like waiving off 10% of loan amount/charges or low-interest rates to individuals who have a credit score above 800. You can use some online tools like Personal Loan EMI Calculator HDFC to calculate the loan amount and then make any decision regarding the loan.

How your credit score is calculated :-

Your credit score is calculated by using different factors related to your past loans and repayment. There are types of credit scores that are provided by different credit agencies. But the most widely used credit score is from FICO (Fair Isaac Corporation). The range of credit score will range between 300 to 900.

The scores are calculated based on five main factors:- the amount owed, repayment history, credit history length, credit mix, and current credit. Each factor has a percentage weight.

We've mentioned the approx. calculation below :-

1. Amount Owed :- The amount you've owed is the total amount of your outstanding debt. This makes up to 30% of the credit score.

2. Repayment history :- Your repayment history is the complete data of how you've paid all your past loans, credits, and debts. Missing even a single installment is shown in this column. This makes up to 30% of the credit score.

3. Credit history length:- The credit history length is the time you've taken to repay a debt. This makes up to 15% of your credit score.

4. Credit Mix :- It is the types of credit, loan, or debts you've taken. So if you're someone who has taken multiple types like unsecured, secured, and credit card loans and repaid the loan amount on time. Then this will be something that should impress the lender. This adds up to 10% to your credit score.

5. New credit :- The number of credits you've currently taken adds up to 10% on your credit score. So if you've taken multiple loans at the same time, then that might affect your credit score. It's advisable to only take one loan at a time. You can take two loans but only if you're capable enough to repay both loans on time. You can apply for a personal loan using online facilities like the Instant Personal Loan App.

Conclusion :- Your personal loan has an effect on your credit score but the credit score also had an effect on your personal loan. So it's important to repay all the installments on time and maintain a decent credit score.

Also read this: What role does a Personal Loan play in ordinary life?