Tips to Secure Better Loan Terms : As individuals plan to take loans, understanding the significance of a credit score, commonly known as the CIBIL score in India, becomes crucial. The credit score plays a pivotal role in determining the interest rates that banks charge for loans. A higher credit score often translates to lower interest rates, making loans more affordable.
Adhil Shetty, CEO of BankBazaar.com, emphasized the importance of maintaining a CIBIL score of 750 or above. He provided a detailed table outlining the Equated Monthly Installment (EMI) and interest rates offered by banks based on different CIBIL scores, highlighting the inverse relationship between credit scores and interest rates.
Credit Score and Interest Rates
First-time loan-takers generally face higher interest rates similar to those with lower credit scores. BankBazaar’s estimates show that individuals with credit scores in the 500-649 range are charged the highest interest rate of 9.65%. Conversely, those with excellent credit scores receive the lowest interest rate of 8.50%. For borrowers with a CIBIL score of 750 or above, the interest rate is approximately 9.15%.
This disparity underscores the financial benefits of maintaining a high credit score. For instance, a borrower with a 600 CIBIL score and another with a 750 CIBIL score would pay an EMI of Rs 903 and Rs 934, respectively, on a loan of Rs 1 lakh payable over 20 years. Although the difference in EMIs might seem minor, the long-term savings due to lower interest rates can be substantial, especially for big-ticket loans like home loans.
Why a High Credit Score Matters
“Your credit score impacts your loan interest rate. In a big-ticket loan such as a home loan, a sizeable interest difference due to a good score can help you save a ton of money. But with a very low score, you may not even get a loan from a bank—even at a high interest rate. Hence you should try to be above 750 at all times,” said Adhil Shetty.
A credit score is a numerical representation of an individual’s creditworthiness, ranging from 300 to 900. Higher scores indicate better creditworthiness. A score above 750 is generally considered good, making it easier for individuals to secure loans and credit cards with favorable terms.
Factors Influencing Credit Score
Tips to Secure Better Loan Terms
Understanding the factors that influence one’s credit score is essential for maintaining or improving it. The following are key elements that affect a credit score:
- Payment History : This includes outstanding balances, timely repayments, the duration of credit-borrowing (calculated from the opening date of the oldest credit account), and credit card transactions. Consistently paying bills on time has a positive impact on the credit score.
- Credit Utilization : This refers to the ratio of the credit used to the total credit limit. Lower utilization indicates better credit management. Keeping credit utilization below 30% of the total credit limit is advisable.
- Number of New Accounts Opened and Closed : Opening a new account can reduce the average age of your credit accounts, which may negatively impact your credit score. It’s important to manage the opening and closing of accounts carefully.
- Credit Mix : A healthy mix of secured (like home loans) and unsecured (like credit cards) credit is likely to boost your score. Diversifying your credit types shows lenders that you can manage different kinds of credit responsibly.
Maintaining a Healthy Credit Score
Maintaining a good credit score requires diligent financial habits. Regularly monitoring your credit report, paying bills on time, managing credit utilization, and diversifying credit types are vital practices. It’s also important to check for any errors in your credit report and get them rectified promptly.
For those looking to improve their credit score, focusing on these factors and gradually building a positive credit history can lead to better loan terms and financial opportunities. The benefits of a high credit score extend beyond just lower interest rates; they also open doors to better financial products and services.
In conclusion, as Adhil Shetty pointed out, maintaining a credit score above 750 is crucial for securing favorable loan terms. The financial advantages of a good credit score are clear, making it imperative for individuals to understand and manage their credit effectively. By being aware of the factors influencing their credit score and taking proactive steps to improve it, individuals can enjoy the long-term benefits of financial stability and lower borrowing costs.
ALSO READ : Best Credit Score Tips : 7 Strategies to improve your CIBIL Score