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(Source: www.moneycontrol.com)

Credit Information Bureau (India) Limited (CIBIL) collects and maintains the records of every individual’s activities with credit card companies, lenders, and banks. CIBIL receives monthly information from all lenders about your various transactions. The details include any change in credit limits, card payments, outstanding balance, and Equated Monthly Installment (EMI) payments.

Using these details, CIBIL uses a mathematical calculation to determine your credit score. It is a three-digit number ranging between 300 and 900, which is used by lenders to determine your creditability. If you have been regular in making your payments, the score will be higher. However, if you have missed several payments or have excessive debt, your credit score may be negatively affected.

Here is how your credit score affects your loan application.

  1. 300–599

A low score acts as a warning to lenders and reflects negative credit worthiness. With this score, lenders will most likely reject your application. It is important that you take the necessary steps to improve your score to avail of a personal loan in the future.

  1. 600–749

Although this is not a very high score, some lenders may approve your loan application. Financial institutions may consider other factors, such as employment stability, the extent of your liabilities, and monthly income to sanction your approval. If these factors offer lenders the confidence that you will be able to service the loan, a lower score may not impact your loan application.

  1. 750 and higher

This is a high score and significantly increases the chances of availing of the loan. A higher credit score also provides other benefits, such as faster approval, lower personal loan interest rate, and greater loan amount.

Here are seven factors that are used to calculate your credit score.

  1. Loan repayment history that contributes 35% to your score
  2. Number of outstanding loans and credit cards you possess
  3. Credit mix comprising secured and unsecured facilities
  4. Total credit balance available
  5. Good balance between unsecured and secured credit facilities
  6. Duration for which you have used credit
  7. Freshly borrowed amount or loans applied for

Every lender has different criteria when approving your loan application. A credit score of 700 is advantageous when you apply for a loan. A higher score increases the possibility of your loan application being approved. When you apply for a personal loan, 750 is considered a good credit score. This increases your chances of loan approvaland you might also receive a competitive rate of interest. Higher scores imply better financial discipline with a good repayment history, which reduces your risk profile as perceived by the lenders.

Financial institutions have several eligibility criteria, such as age, employment history, and monthly income. However, an important criterion is your credit score and here are four things you should do before availing of a personal loan.

  1. Check your score

Every lender checks your CIBIL score. However, you must check your score before making an application. This enables you to rectify any errors that may be on your credit information report (CIR).

  1. Determine your eligibility

A score of 750 or more is considered a good score for availing of a loan. If your score is significantly lower, it is recommended you do not apply for the loan. In case your application is rejected, your credit score further reduces, which makes it more difficult to avail of a loan in the future.

  1. Time your loan applications

In case a lender rejects your loan application, it is crucial you do not apply immediately with another financial institution. If multiple lenders reject your application within a short period of time, your credit score is negatively affected.

  1. Negotiate terms and conditions

If your score is 750 or higher, it is advisable to negotiate with the lenders. You may be able to reduce the interest rate and enjoy better terms on the loan.

You may avail ofpersonal loans online or offline from banks as well as non-banking financial companies (NBFCs). An onlineapplication makes the entire procedure quick and hassle-free. Moreover, lenders require minimal documentation, which enables you to receive approval within a few days.