Updated March 24th, 2024 at 13:26 IST

Pursuing personal loan? Here's how to mitigate credit score obstacles

Unlike secured loans backed by collateral, personal loans depend largely on your creditworthiness and repayment capability.

Reported by: Business Desk
Personal loan | Image:Freepik
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Watch credit score: Eyeing a personal loan? Make sure your credit score doesn't become a roadblock in your path. According to experts, your credit score should ideally be above 750 to enhance your chances of loan approval and secure favourable interest rates.

"A strong credit score is essential for securing personal loans. Whether it's covering medical expenses or embarking on a dream vacation, prioritising credit score improvement can enhance your eligibility and potentially lead to better loan terms," said Arpit Suri, CA, personal finance expert.

What is a credit score?

Your credit score is a numeric representation of your credit history, serving as a gauge of your creditworthiness. Issued by credit bureaus like CIBIL, CRIF High Mark, Equifax, and Experian and TransUnion, this score typically ranges from 300 to 900.

Unlike secured loans backed by collateral, personal loans depend largely on your creditworthiness and repayment capability. Financial institutions scrutinise your credit score to assess the risk associated with lending you money.

How do credit scores affect your finances?

Loan eligibility

Many lenders set a minimum credit score requirement, often around 750, for personal loan approval. Falling below this mark might lead to rejection, although other factors like income and debt-to-income ratio may also be considered.

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Interest rates

A higher credit score, usually above 800, can lead to lower interest rates on personal loans, potentially saving you money over the loan term.

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Looking to boost your credit score?

Timely repayments

Consistently paying off loan EMIs and credit card bills on time signals reliability to lenders, boosting your credit score.

Lower credit utilisation

Keeping your credit utilisation ratio (credit used compared to credit available) below 30% showcases responsible credit management and positively impacts your score.

Avoiding frequent loan applications

Limiting the number of loan or credit card applications within a short timeframe demonstrates financial prudence and protects your credit score from negative impacts.

Diverse credit mix

Maintaining a healthy mix of secured and unsecured loans can bolster your creditworthiness over time.

Retaining old credit accounts

Keeping longstanding credit cards or loans active, even if not frequently used, contributes positively to your credit score due to an extended credit history.

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Published February 18th, 2024 at 19:48 IST