We often save money to keep ourselves covered on rainy days. But our savings don’t always suffice for some big-ticket expenses. Even if they do, it’s not wise to tap into your savings to finance a big-ticket expense. For instance, relying on your savings to fund a home improvement project or a wedding will put a burden on your finances. In situations like these, a personal loan may come in handy. An unsecured personal loan can help you bridge financial gaps without the use of collateral. Personal loans usually come at a lower interest rate than credit cards and allow you to borrow a large sum of money.
While lenders aren’t laser-focused on credit score, it is, undeniably, an integral part of their decision making. Your credit score is a rating given to you, based on your credit report. Your financial history, including payment history and credit history, contribute significantly towards your credit score.
When it comes to credit scores, there is no discrete value that lenders look for. The eligibility criteria vary from lender to lender. So, what credit score do you need to qualify for a personal loan? Read on to find out.
Here’s the ideal credit score
There is no definitive value that defines a good credit score. Different Credit Reporting Agencies have varied scoring criteria. For instance, Experian marks credit scores out of 999, whereas TransUnion and Equifax mark credit scores out of 710 and 700, respectively. So, you can get different credit scores from each agency.
As per Equifax’s scoring model, a credit score that ranges from 580 to 669 is generally considered ‘fair’. A ‘good’ score ranges anywhere from 670 to 739. An ‘above average’ credit score could lie between 740 and 799. Anything above 800 is as an excellent score. If your credit score is ‘very good’ or ‘excellent’, it indicates that you’ve demonstrated responsible credit behavior in the past. This encourages lenders and increases the chances of approval for your loan application.
Experian’s model scores out of 999. A score ranging between 0 and 560, would be considered ‘very poor’, with slightly narrow chances of approval. A score between 561 and 720 falls into the ‘poor’ credit score category. In this case, loan application may get approved, but at a higher interest rate. For people within the ‘fair’ range of 721 to 880, credit limits may not be very generous. Whereas, if your score is between 881 and 960, you’re ‘good’ to go for most credit cards, loans and mortgages. However, you need a higher score to secure the very best loan offers. If your score is above 960, you’re an ‘excellent’ candidate for any mortgage, loan or credit card, wherein you can avail the most favorable offers.
How does a lender judge my credit score?
More often than not, lenders consider applicants with a score of 670 and above, as ‘lower-risk’ borrowers. Applicants whose score lies between 580 and 669, are usually considered ‘sub-prime’, implying that they may not be eligible for competitive loan terms. Scores below 580 or a ‘poor’ credit rating would have a very slim chance at qualifying for feasible loans terms, or credit altogether.
Each lender has their own set of terms while assessing loan applications. While you may be the ideal candidate for one lender, you may not be a good fit for another. But to qualify for a loan, you must demonstrate creditworthiness. Lenders determine your creditworthiness by assessing your income, financial history and credit score.
In most cases, scores between 550 and 580 are likely to qualify for a personal loan. You may not be eligible for competitive rates and more feasible loan terms with this score. But credit score requirements differ among different lenders.
Impact of my credit score on my personal loan application?
- Under 600: There’s a lot of room for improvement. Lenders who offer you a loan may charge an exorbitant interest rate – perhaps 30% or more.
- Between 600 and 700: The higher your score, the better deals you will get. With this score, most lenders will offer you feasible loan offers.
- Above 700: With this score, you can easily avail the best, most competitive loan offers.
Tips to keep a healthy credit score
- Avoid defaults by making timely repayments.
- Your electoral roll registration should be up-to-date to expedite the verification process.
- It is good to have some credit history. This helps in building your credit score.
- Your credit utilization ratio should low.
Once you’ve improved your score:
- Space out your loan applications. Too many applications in a short span harm your credit score.
- Close any unused accounts that may still be running. They can affect your credit limit. You should have a low overall credit limit.
- Avoid delinquency at all costs. Try and maintain a neat payment history.
- Borrow what you can afford to avoid falling into a debt trap.
- Check your credit report regularly to look for any discrepancies that could lead to fraud.