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Anyone who has taken a loan or is thinking of taking one is likely aware of credit scores. Understanding how important a credit score is for getting a loan and its significance is essential. It is commonly said that your credit score affects your loan’s interest rate. A good credit score helps you get attractive loan offers with lower interest rates.
If your credit score is low, you will receive a loan with a higher interest rate. Banks and lending companies offer loans based on risk grades. Those with a low-risk grade get loans at better interest rates. Let's explain the connection between risk grades and credit scores, how they are calculated, how interest increases, and what you can do to reduce it.
Difficulties at the start of a credit score:
If you haven’t taken any loans or applied for a credit card, you are an NTC (New to Credit). Your CIBIL score will be assigned as 1. However, if your credit history is minimal, say less than six months, your CIBIL score could be zero. But this isn’t a bad thing, as everything starts from zero.
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Due to this, you may face temporary challenges. Banks offer loans at higher interest rates compared to those with good credit scores. An NTC person might get the same interest rate as someone with a CIBIL score between 700 and 749.
Best offers above 750:
A CIBIL score above 750 is considered a great benchmark. If your CIBIL score exceeds this, most lenders will offer loans at favorable interest rates. However, variations depend on different lenders and banks. Some lenders consider 800 or 810 to be a good benchmark, and borrowers with such scores are termed super-prime borrowers.
These individuals demonstrate strong financial conditions and high creditworthiness by making timely payments and managing their loans properly. Achieving this credit score isn’t difficult. You should have a mix of secured loans like home loans and unsecured loans like credit cards. By making timely payments on these, you can reach the super-prime category.
Below 750 requires effort:
A 750-credit score often reflects a lack of credit experience, high credit limit usage, or perhaps some late payments. Hence, you need to be cautious. If you improve your credit habits, you can reach above 750 in a short time.
However, if you continue to make late payments and use too much of your credit limit, your credit score could drop even further.
Below 700 signals trouble:
If your credit score reaches around 600, it indicates more than just late payments as the cause. You may have defaulted on a loan or taken a loan settlement offer from a lender. This situation isn’t favorable. At this credit score, you will receive loans at very high-interest rates, as you will be considered a high-risk borrower.
As a result, lending companies and banks will offer loans at higher interest rates. To avoid this, you need to pay off your entire outstanding balance, including all processing fees, penalties, and interest. Additionally, ensure that future payments are made on time. During this time, check your credit score at least once a month to stay informed.
Below 600 makes loans difficult:
If your credit score drops below 600, defaults and a negative credit history could be the cause. Banks have a risk-grading system, and in such cases, you might not be eligible for a home loan. However, non-banking financial companies (NBFCs) have different rules. You may be able to get a loan from them, but the interest rates will be much higher.
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