When you apply for the loan, the initial thing the lender does is to check your credit report and your credit history. So, what is a credit score, and why is your credit score important to be checked by banks or lenders? A credit score is one of the crucial parameters that banks/lenders must factor in to know your credibility. As an outcome, it is crucial for you to keep a watch on your credit score so that it is on the higher end.
Let’s discuss in detail what is meant by credit score, why it is important, and how it is a major factor when it is about getting a loan or credit card approval.
What is meant by a credit score?
A credit score is a representation in a numerical form of your credit history. A credit score gets generated based upon several factors like pending loans, credit repayments, credit card transaction history, etc. Depending upon these and various other parameters, lending institutions and banks determine whether to approve your credit card or loan application.
- A credit score is a 3-digit number that ranges anywhere between 300 and 900.
- A number nearer to 900 is considered prudent, while a number below 650 is considered poor, which requires you to work on your score to avail of the desired loan or credit loan.
- For you to obtain the desired loan at a comparatively lower rate of interest, it is crucial for you to strictly maintain a strong credit history.
- Credit history is utilized by lenders, financial institutions, and others to decide whether to grant you a loan/credit card.
- Even though there are several other parameters factored in a while approving your credit application, a credit score is one of the most crucial.
What are the maximum CIBIL score and minimum CIBIL score?
Higher your credit score, the better it is. Listed are the credit score values specifics and their implications:
| CIBIL score | The health of credit score |
| 750 – 900 | Strong credit score
Repayments are made on time and in a disciplined way There are no late repayments There is no outstanding balance High negotiation potentials A lesser rate of interest Error-free credit history Clean credit history |
| 650 – 749 | Acceptable credit score
Disciplined and strict repayment practices Credit history with no errors Eligible for loans and credit cards Extremely less risk of turning into a defaulter Higher rate of interest |
| 550 – 649 | Fair credit score
Hard inquiries Repayment irregularities |
| 300 – 549 | A low credit score shows irregular repayment history
Payment failures Possibility of loan default High reliance on the credit |
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Why do you require a strong credit score?
Following are a few of the benefits of having a strong credit score:
Low rate of interest
Building a strong credit score permits you to avail yourself of low rates of interest on credit cards and loans, making it simpler for you to repay the money. As an outcome, if you are looking to apply for a loan or credit card, ensure to make this a habit to review your score daily.
Instant credit card and loan approval
A strong credit score determines your credibility. Hence, users with a strong score enjoy timely credit card and loan approvals. Applicants with very low credit scores are constantly turned down by the banks/lenders because they cannot trust their credit history. Also, if you hold a strong credit score, there is zero assurance that you will get approved for the credit card or loan. It is necessary to remember that when availing loan or credit card, specific other parameters are taken into consideration.
Negotiation power
A credit score of nearly 900 is thought to be strong as it endows you with the potential to negotiate the rate of interest on your credit card limit or loan amount. It implies that a strong credit score holds the potential to enhance your bargaining power. Apart from this, holding a strong credit score permits you to take the benefit of special deals, discounts, and offers.
Higher approval amount
Based on your credit score and income, lending institutions and banks determine your loan amount. Having a strong score permits them to provide higher loan proceeds. However, if applicants with low credit scores ask for higher loan proceeds, then he or they might get the proceeds approved at a higher rate of interest.
Acquiring a suitable credit card
A strong credit score qualifies for the best credit card on the market. Such credit cards have the lowest rewards, interest rates, discounts, deals, offers, and cash backs. Next time you consider availing of something with such benefits, ensure you have the habit of repaying your loan EMIs and credit card dues on time.
What are the important factors that impact your credit score?
Your credit score may be impacted by different factors. However, if such factors are better addressed, they also provide good results. Here are how it works:
Payment history
Your payment history shows how diligent you are regarding your loan EMI repayments or credit card balances. Any overdue amount, late payment, etc., will have an immediate impact on your score. As banks and lenders prioritize your credit score before starting the loan approval process, it is important to form the habit of making credit card balance and EMI repayments on time.
Credit utilization ratio (CUR)
CUR (credit utilization ratio) is the amount utilized from your overall credit amount provided by the lender. Spending nearly 30 percent of your overall credit limit is thought to be appropriate. However, expenses that are higher than or the same as the given amount have a negative effect on the score. It is because spending a lot on your credit card shows that you depend massively upon it. Hence, it is recommended to keep your CUR within 30 percent.
Credit types
There are 2 kinds of credit accounts: installment loans and revolving accounts. The balance between these 2 kinds of accounts helps in the improvement of your credit score. Balance is a crucial parameter as it demonstrates how you manage to handle both accounts.
