“Que Sera Sera, Whatever Will Be, Will Be”. The Doris Day classic, aptly sums up the irony faced by personal loan rejected applicants. You are all geared up to travel the world. You want to experience the sunset in Ibiza, climb the Eiffel Tower in Paris, visit the Great Wall of China, and feel younger at Disneyland. How will you pay for this trip? Easy! Get a personal loan! How hard can it be? You have the income, the age and the purpose. So, what’s stopping you…? There’s this one thing. The same one thing that got your personal loan application rejected at numerous banks and at Loan Singh (a digital lending platform) – your poor credit score. How can my past performance, warrant a rejection now? My dear friend, that is the key. A smart individual is one who embraces the financial mistakes of the past, and then acts on it to correct them. Through this piece, we want to focus on salaried professionals who are on a low credit score, and are certain to face a rejection. Let’s look at who prepares your credit report, why the score is so important, and how to turn it around like a pro.
Who Keeps Track of Credit Score?
This distinction goes to the credit information bureaus in India. There are 4 licensed credit information bureaus namely CIBIL, Experian, Equifax and Highmark. Out of these, CIBIL is the most accessed credit bureau. As the name suggests, a credit bureau is a bureau that houses your credit information. It maintains the information sourced from credit institutions such as banks, credit card companies, debt collection agencies and the government. Credit bureaus look at your credit repayment patterns to determine how much of a risk you pose to the credit lending institution. Whenever you go to a credit institution for fresh credit, a hard inquiry is raised by the institution to the credit bureau. The inquiry is basically a request to fetch your credit repayment history. The bureau, then sends the history back to the institution in the form of a credit bureau report; with a compiled numerical score called credit score.
Credit score is a reflection of your monthly payments of loan EMI and credit card bills. It also considers the above mentioned hard inquiries. The credit score is a reflection of your promptness in paying loan EMIs and credit card bill payments. The score is accompanied by your personal information such as name, date of birth, residential address, corporate address, PAN, Voter ID, contact details along with figures for size of loan, credit card limit, outstanding current balance etc. Credit institutions consider your credit score to approve your loan application. A poor score means you are a potential risk in case your credit request is approved. Because it gives an overall picture of your credit responsibilities in the past, it is a trusted system followed by credit institutions.
Credit score ranges
The credit score has a minimum value of 300 and a maximum value of 900. The higher your credit bureau score, the better are your chances of getting credit from credit institutions like banks, digital lending platforms and credit card issuing companies. The credit score ranges are mentioned below
Score less than 0 – A credit score of 0, or less, means that you have no credit history. It is wise to apply for a personal loan from a digital lending platform because banks are likely to reject your loan application.
Score between 350-500 – A score between 350 and 500 is poor, indicating either a default in past EMI payments or excess credit utilization on credit cards.
Score between 550-650 – A score at this range is acceptable; it indicates that you have been regular with your payments and can be trusted for fresh credit. The chances of getting a loan approved are good.
Score between 650-750 – This range indicates that you are doing well with your finances. You should stick to your financial habits to maintain or improve your score. The chances of getting a loan approved are great.
Score between 750-900 – This is considered the best range for a borrower. This clearly indicates that you have been regular with your EMI or credit card bill payments. You can avail a loan with ease.
6 Tips to Improve Your Credit Score
By now you know how critical your bureau score is for your personal loan approval. Fret not! We now provide you 6 tips on how to improve your credit score.
Late Repayments – This is easily the most important reason for a poor credit score, ensure you repay your EMIs and bill statements on time – each month. If you don’t know what sudden expenses could come-up next time, have some emergency funds in place. Set up auto debit feature so that your EMIs are directly debited from your account by the credit institution.
Maxing out your card limit – Keep your credit card spending at a low. Aim at spending only up to 40% of your limit. Don’t try to apply for a 2nd credit card if you are struggling with the first card itself. This will lead to a double jeopardy of rejection along with a hit to your credit score.
Healthy mixes of credit – Ensure you have a good mix of credit, i.e. a mixture of personal loan, secured loan and credit cards. This tells the credit institution of the experience you have while servicing debt. In case you have no credit history, yours truly (read Loan Singh) will still approve of your personal loan request.
Closing multiple cards at once – In case you own multiple credit cards, and are planning to close one or two immediately, do so at periodic intervals. Closing a credit card means closing that card’s repayment history, which will anyway reduce your credit score. Also remember to close the newest cards first.
Avoid credit frenzy – Do not apply for fresh credit, at multiple institutions, within a short span of time. Too many inquiries, in a short span of time, would indicate desperation for credit, and will affect your credit bureau score.
Check for errors – Apply for your credit report just before you want to apply for fresh credit. This way you will know what errors are present on your report, and you will have a chance to rectify it. Dispute the errors, and apply for a new report to see if the changes are updated by the bureau.