When applying for a loan, the bank checks the credit score and history. Your bank will likely reject the application if your credit score is low or your credit history isn’t good. That’s why assessing one’s creditworthiness before applying for any loan is so important. No matter how sound your financial plans may be, banks won’t consider them if they don’t see a good enough representation on paper.
However, with a good score, your personal loan approval process will likely be instant. Your CIBIL/credit score is the primary factor determining your loan approval. You must therefore comprehend what affects this score and work towards increasing it if it is below expectations.
We often assume that not paying our credit card bills on time will significantly harm our credit score. Yet, there are several other criteria we must consider to maintain a strong credit history. Here is a list of components that may influence your credit rating:
- Having Many Loans and Credit Cards
With offers like 0% interest rates for your first year, submitting applications for new credit cards can be tough to resist. The downside is that your score reduces slightly each time you do so. Plus, frequent card applications may make lenders think you’re experiencing financial hardships. To maintain a high-quality credit rating, it’s advisable to only apply for cards after six months or so.
The same case is having many loans, both secured and unsecured. They could both lower your credit score. When applying for a loan, banks and other financial institutions look at your Debt-to-Income (DTI) ratio to decide if you are eligible or not. If the DTI shows that you already have excessive debt, the lender will be unwilling to provide additional credit.
Banks will deem you unable to manage your monthly EMIs if they discover you own several credit cards. It’s not only owning multiple credit cards, though; even closing them can also harm your credit score. When you close a card, the amount of available credits decreases, which could significantly reduce your credibility in the eyes of lenders.
- Making Payments Late
Timely payment of debts is essential to protect your credit score. When you are late or fail to pay your personal loan, it reflects poorly on your credit history and can cause your score to drop. To prevent this, make all payments promptly and monitor single and joint accounts regularly for any missed payments. With these practices in place, you will maintain a solid credit rating.
- Increased Credit Amount
Requesting an increase in your credit limit can impact your credit score, which may signify that you are over-dependent on credit cards. It is wise to only request the amount you need. Monitor how you use the credit cards and the balances. It’s wise to know your credit utilization and aim to keep balances low.
- Applying for New Credit Frequently
Applying for too many credit cards or personal loans within a short timeframe can immensely impact your credit score. That said, you must maintain a healthy income-to-loan ratio to keep good standing with your credit report.
- The High Credit Utilization Ratio
If you’re a heavy credit user, it will be reflected in your CIBIL score, and lenders may consider you a higher-risk borrower. High credit utilization tells the lender that repayment of loans could become an issue for you. Consequently, monitoring the amount of debt linked with each account or line is imperative to avoid overspending. If your credit utilization ratio is below 30%, the lender deems you economically responsible and typically prefers borrowers with this credit utilization rate.
- Frequent Applying for Balance Transfers
When you sign up for a credit card that offers balance transfer options, it will be added to your credit report. Unfortunately, if you keep transferring balances between cards repeatedly, it can negatively affect your score. So, it’s ideal to use other methods instead of shifting the balance around and applying for multiple transfers; paying off the debt may be a better option.
- Payday Loans
Payday personal loans can also hurt your credit score. When evaluating your credit score, credit reporting bodies will usually consider the types of creditors you have requested loans from. This is because they recognize that applying for one with a bank may pose a lower risk than doing so through a payday lender. Lenders may charge an establishment fee of up to 20% and a monthly service fee of 4%, so make sure you weigh your options before deciding how to access funds if you need them.
Maintaining a good CIBIL score is of the utmost importance. It affects more than just your loan interest rates; it can also affect whether you are approved for a credit card and provide employers with insight into your financial history. It is vital to keep track of your credit score and history and prevent the habits that can lower it in any way while striving to improve it.
If you’re searching for a loan but don’t want to go through the hassle of credit score requirements, lendingplate is the perfect fit. All you need is minimal documentation and to meet the simple criteria to be approved instantly.