The credit score also assists banks and other lenders in assessing the likelihood of a borrower defaulting on a loan.
Credit Score
People who are interested in taking out small personal loans or quick loans are typically evaluated to determine how creditworthy they are. This is when a credit score becomes useful, as it helps financial institutions evaluate a borrower's ability to repay the loan. If you are considering applying for small personal loans or quick loans, it's crucial to understand how your credit score influences your borrowing capabilities. Here are the details.
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What is a credit score?
A credit score is a numerical indicator of a person's creditworthiness. It is a figure that represents your capacity to repay debts. The credit score also assists banks and other lenders in assessing the likelihood of a borrower defaulting on a loan.
In India, the credit score is calculated by a Credit Bureau, an organization that has access to your credit history and credit information. Based on this information, the bureau determines your credit score, which is a three-digit number usually ranging from 300 to 900. Businesses, like individuals, are also assessed by credit bureaus to find out their business credit scores.
The top credit bureaus in India are TransUnion, CIBIL, CRIF High Mark, Experian, and Equifax. These credit bureaus play an important role in the Indian financial ecosystem by facilitating efficient loan choices, increasing transparency, and establishing a positive credit environment.
How is your credit score calculated?
Your credit score is derived from several factors, which are outlined below.
- Your repayment history: This refers to how consistently you have paid off your previous debts.
- Your credit balance: This term refers to how much of your approved credit remains unused. The more credit you use, the higher your risk of defaulting.
- The length of your credit usage: The period over which you have used credit and how timely you have been in making repayments during this time affects
- New credits: Frequent inquiries for new loans or credit cards can negatively impact your credit score, giving the impression that you are overly eager to take on substantial debts.
- Your credit mix: The variety of your credit types, including secured and unsecured loans, as well as short-term and long-term credits, plays a role in determining your credit score,
What is an ideal credit score?
While your credit score can vary from 300 to 900, having a score above 750 typically makes it easier to obtain unsecured credit such as small personal loans and quick loans. If your score is below 750, it can be more challenging to secure funding from banks and other financial institutions.
How does it impact your eligibility for small personal loans?
Your credit score affects your ability to secure a personal loan in two main ways:
- Your overall eligibility: Your credit profile is a key factor in determining whether you qualify for a loan. Conversely, those with lower scores may struggle to meet the eligibility requirements set by these lenders. A moderate credit score may qualify you for small personal loans but could leave you ineligible for larger loans.
- The rate of interest: Your credit score also determines the interest rate you will be charged. Lenders, from traditional banks to new age small finance banks, typically offer loans at lower interest rates to borrowers with clean credit histories. However, a poor credit score, even if it qualifies you for quick loans, will result in higher interest rates because lenders will want to ensure that a significant portion of the loan is repaid early, given the higher risk of default.
How can you improve your credit score?
Now that you understand how your credit profile can impact your borrowing ability, here are some tips to improve your credit score:
- Pay your EMIs on time.
- Cancel dormant credit cards.
- Avoid applying for too many loans within a short period.
- Make partial prepayments whenever possible.
- Choose shorter loan tenures as much as your finances allow.
Before applying for a loan, you can check your loan eligibility and learn more about your approximate EMI schedule with the Unity Bank Personal Loan EMI Calculator. If your credit score falls within the right range, you can easily avail of small personal loans from Unity Bank. With attractive interest rates and easy repayment schedules, Unity Bank’s small personal loans and quick loans might be the financial solution you are looking for.
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