Credit Score – The Key to Obtaining Loans

One of the prime eligibility factors when you apply for a loan or a Credit Card is the necessity to have an excellent credit score. Apart from satisfying the income criteria, you should exhibit an impeccable repayment record. Your credit rating will tell it all. Let us understand what a credit score is, and how can you develop or improve it.

What is a credit score?

A credit score or rating is a three-digit number usually ranging between 300 and 900. It indicates your creditworthiness. The higher the number, the better is your credit rating. Any score over 700 is excellent. If you have a credit score below 550, the chances of getting a loan are bleak.

Factors that determine your credit score

Many factors go into determining your credit score.

1. Your repayment record is a crucial one. Defaults in repayment can reduce your rating.
2. Credit Utilisation Ratio (CUR) is also a vital factor. It gains significance in matters concerning Credit Card accounts. CUR is the ratio of your Credit Card utilisation (outstanding amount) to the approved limit. A rate of 30% is ideal.
3. The age of your debts has weightage as well. The older your obligations are, the better is your credit history. Of course, you should have a good repayment record to complement this factor.
4. The number of loan accounts you have also decides your credit score.
5. The higher the ratio of unsecured to secured loans, the lower is your credit rating.
6. The number of credit enquiries can affect your credit rating. The higher the number of queries, the lower is the rating.

No credit history

How do you have a credit history when you have not availed of a single loan in your life? Many people face this issue. Under such circumstances, your credit score will be either 0 or -1. It does not entail that you have a bad rating. Such a rating indicates that the rating agency does not have enough data to determine your credit score. It still makes you eligible to get loans depending on your income and other credentials.

How do you improve your credit score?

You know the factors that affect your credit score. Let us now focus on how to develop your credit score.

If you have a bad credit score (300 to 500)

• Improve your repayment record. Clear out the defaults and bring the accounts into order.
• Reduce your CUR by bringing down your Credit Card balances. Alternatively, apply for secured Credit Card limits against your Fixed Deposits.
• Keep your older Credit Cards accounts live and in order. You can proceed with closing the new accounts, as it will not affect the age of your accounts.
• Reduce the number of loan accounts you maintain by closing some accounts.
• Maintain a healthy balance between your secured and unsecured loans.
• Refrain from applying for new loans until you improve your credit score.

If you do not have a credit score (0 or -1)

• Apply for a secured Credit Card (against your Fixed Deposits) and use it to improve your credit rating. Make regular payments and maintain adequate CUR.
• Bring a co-borrower with a good credit rating and apply for a joint loan. Maintain the account well by repaying the instalments on time.
• Avail of secured loans such as Mortgage Loans, Home Loans and so on.

It will take some time for you to build up credit. Once you do so, you can apply for new loans such as Credit Cards, Personal Loans, and so on. Your credit score decides whether you are eligible for loans. It is in your hands to improve it.

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