Loans have various eligibility parameters on which the borrower is judged by the lender before the loan is issued. Common eligibility parameters include age, income, work experience, etc. One such important eligibility requirement is credit score. Every lender assesses the credit score of the borrower before issuing the loan. Let’s understand what the score is all about and how it affects loan eligibility.
What is credit score?
Credit score is a score which measures your creditworthiness. The score is measured based on your past and existing credit history. The score ranges from 300 to 900. The higher the score the better is the creditworthiness it depicts.
How is the credit score calculated?
The credit score is calculated by credit rating agencies the most popular of which is CIBIL. The score consists of five main components which have a specified weight on the score. These components include the following –
1. History of past payments on debt (35% of the score)
This contains details of your past payments and reflects any late payments or defaults on your debts.
2. Credit usage (30% of the score)
This factor measures how much credit you have used against the credit limit available to you. The lower your credit usage the better would be the impact on your credit score.
3. History of credit (15% of the score)
This measures for how long you have been utilising credit, the longer the better.
4. New credit (10% of the score)
This factor sees the recent loans to which you have applied. If you have higher loan applications in recent times, the score would be adversely affected.
5. Mix of credit (10% of the score)
The last factor assesses the type of credit you have availed, whether it is secured or unsecured or a mix of both. A healthy mix of credit has a good impact on the score.
Aggregating these five factors and their contributions, your score is calculated.
Interpreting the score
- 300 to 600 – this range is considered to be a bad score or a low score. Loan applications usually get rejected if your score lies in this range
- 600 to 700 – this is a moderate score where you might be able to avail unsecured loans
- 700 to 900 – scores over 700 are considered to be good and lenders are favourable to borrowers with scores over 700. Secured loans are, usually, offered to borrowers who have scores over 700
Impact of the credit score on secured loans
The credit score has major impacts on availing secured loans. Here’s how –
• A high score lets you avail a secured loan quickly
• The credit score determines the interest rate which the lender would charge. A higher score means a lower rate and vice versa
• Low credit scores result in loan rejections. Even if some lenders allow you loans with bad credit score, the processing would take a lot of time, the loan amount would be limited and the interest rate would be high
• High credit scores also allow you to negotiate with the lender for the loan interest rate as well as repayment tenure
So, your credit score is an important measure of your eligibility qualifications when you apply for secured loans. Therefore, make sure that you have a good score before you apply for the loan.