Table of Contents
- Introduction
- What is a Credit Score?
- What are the Determinants of Credit Score?
- What is the Importance of Good Credit Score?
- What are the Tips to Build Your Credit Score?
- Conclusion
Introduction
Everyone needs credit for different purposes and depending on the purpose loans are classified into various categories such as personal loan, home loan and tractor loan. Your chances of getting a loan depends on creditworthiness or financially responsible behaviour in the eye of a lender.
Now, how does a lender determine whether to lend to a particular individual. The lenders like banks and NBFCs uses a criterion called credit score, which is a three-digit numerical expression derived from a set of financial parameters such as repayment history and credit mix.
What is a Credit Score?
Credit Score tells about the credit history of a borrower and determines the creditworthiness in the eyes of the lender. Through your credit score, the lenders like banks and NBFCs know the likelihood of you repaying the loan on time. The higher the creditworthiness, the higher the chances of getting a higher loan amount at attractive interest rates and vice-versa.
The credit score is expressed as a three-digit number ranging from 300 – 900. Usually, a credit score above 700 is considered as a good credit score for your loan application to be considered and approved. A credit score or CIBIL score above 800 or 900 is an excellent score in the lender’s eye and you may get loan approval at highly favourable terms.
What are the Key Determinants of Credit Score?
Repayment History: if you have been paying your previous loan EMIs consistently on time, it indicates good repayment behaviour and will improve your CIBIL score. A default or inconsistency in repaying a loan will decrease your chances of getting a loan.
Credit Utilisation: Utilising your available credits in the revolving account balances such as credit card responsibly also helps improve your credit score. If utilisation rate is within limits, then your credit score gets high, and if it is outside recommended limits, then score gets impacted negatively.
Credit Mix: Your credit profile must reflect different types of credit such as credit card, home loan, and tractor loan. Or, you must have an optimum mix of secured and unsecured loan. This will help increase your credit score. Keeping only one loan account will not boost your CIBIL score.
Credit Enquiries: A credit enquiry is an enquiry about your creditworthiness. If done by banks and NBFCs seeking a detailed list of all your loans or debt-to-income ratio, it is called hard enquiry and impacts your credit score negatively. On the other hand, an enquiry for a pre-approved loan is called a soft enquiry and does not impact your score. So, keep the hard enquiry to as minimum as possible to improve your chances of tractor refinance.
In addition to the above, recently, the TransUnion CIBIL has brought CIBIL Credit and Farm Report for the purposes of agri-lending. It helps lenders assess the risk associated with farm lending objectively by taking into account crop production risk also. It helps address associated agricultural risks and increases credit access to farmers.
What is the Importance of a Good Credit Score?
A good credit score is essential for quick approval and disbursal of a loan. Some other reasons may be cited below:
- It increases the chance of loan approval at favourable terms such as longer loan tenure, lower interest rates and lower down payment requirements.
- It also increases the chances of getting finance from a large number of lenders; thus, giving you an opportunity to choose the best as per your needs and circumstances.
- A good credit score is critical for farmers as it enables them to get a tractor loan or an implement loan at highly competitive interest rates or with low processing fees.
- A good credit score always gives you an advantage in terms of negotiation. You can negotiate with a lender for a higher sanction amount or lower interest rates.
What are the Tips to Build Your Credit Score?
First, maintaining financial discipline, that is, pay your loan EMIs and credit card bills on time. It is the single biggest factor that boosts your credit score.
Second, bring down credit utilisation rate. Keeping your credit utilisation within 30% of the available credit on credit card helps build a good credit score.
Third, maintaining a good debt-to-income ratio, meaning your income should be at least 60% greater than your total debt. This ensures the lenders that your repaying capacity is all good. So, avoid over-borrowing.
Fourth, you must clear your outstanding debt. This increases your credit score and your chances of loan approval.
Fifth, limit your loan applications as every time you apply for a loan a hard enquiry is generated which reduces your credit score. The higher times you apply for a loan, it indicates to the lender that you are credit hungry and this may impact negatively.
Sixth, you must always check your credit score, and if found any error or discrepancy, you must quickly report to the Credit Bureaus to get it corrected.
Conclusion
Individuals need credit for different purposes ranging from personal to buying a home or a tractor. Various forms of credit are offered by the lenders but to get your loan application approved a good credit score is imminent. So, start taking steps to maintain a high credit score starting today.
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