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Understanding the Importance of Credit Scores for Personal Loans

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Understanding the Importance of Credit Scores for Personal Loans

You’ve probably seen your credit score mentioned in ads for a personal loan and you may have even applied for a personal loan without really knowing what your credit score is and why it matters. In this post, we will demystify and decode your credit score for a personal loan and explain why it matters when you’re looking for a personal loan

Various factors determine your credit score, including your payment history, the amount of debt you have, your credit history, and the types of credit you have. Of course, payment history is the most critical factor in your credit score, so making all your payments on time is essential. However, the other factors are also important, so keep a mix of different credit accounts (such as a mortgage, car loan, and credit card) and keep your balances low relative to your credit limits.

What is a Credit Score? 

The numerical representation of your creditworthiness is your credit score. It is the likelihood that you will repay any debt you borrow. So apply for a credit score on NBFCs like Clix capital offers good. Credit scores vary from 300 to 850; most people fall in the middle. Approximately one-third of India has a credit score between 650 and 799, while only 13 percent of India has a credit score of 800 or above. But people can get a personal loan without a good credit score. A “good” credit score depends on the lender, but anything above 700 is generally considered good. Anything below 650 is considered bad.  

How Is My Credit Score Calculated? 

Five main factors go into calculating your credit score for a Personal Loan:

  1. Payment history (35 percent)
  2. Amounts owed (30 percent)
  3. Length of credit history (15 percent)
  4. New credit (10 percent)
  5. Credit mix (10 percent)

Payment history refers to whether or not you make your payments on time; amounts owed refer to how much debt you currently have; length of credit history measures the average age of your accounts. New credit involves looking at how many new accounts you have opened recently, and finally, credit mix examines the variety of debt you have (e.g., student loans, auto loans, etc.).  

What Is a Good Credit Score?

As we mentioned earlier, what is considered a “good” credit score can depend on the lender—some lenders may be more lenient than others—but generally speaking, anything above 700 is usually considered good. At the same time, if you have a credit score below 650, you will be said to have a bad credit score. You cannot get a personal loan for a low credit score. However, some private loan lenders are willing to work with borrowers with bad or no credit history. These lenders usually charge higher interest rates to offset their increased risk. So why does your credit score matter for personal loans? Read on to find out. 

Why Does My Credit Score Matter for Personal Loans?

Your credit score matters for personal loans because it represents how likely you are to repay a borrowed debt. A higher credit score makes you a low-risk borrower and, therefore, more likely to get approved for a loan with favorable terms (i.e., a lower interest rate). Conversely, a bad credit score means you’re a high-risk borrower and, therefore, more likely to get denied for a loan or offered unfavorable terms if approved. Some personal loan lenders are willing to work with borrowers with bad or personal loans without credit scores. Still, these lenders will likely charge you a higher interest rate to offset their increased risk. That’s why it is beneficial to know your credit score—to shop around for the best possible loan option available.

Final Thought 

The credit score for a personal loan is an important number that lenders look at when deciding if they want to give you a loan and at what interest rate. So make sure you understand your credit score and take steps to improve or apply for a personal loan for a low credit score if needed so that you can qualify for the best rates possible when it comes time to borrow money.