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Loan Eligibility and Credit Score: The Different Ranges and What They Mean

Your credit score range is more than just numbers on a paper; it’s a financial indicator that can significantly impact your life. It’s crucial to comprehend the various credit score ranges and the implications they carry. Let’s delve deeper into each range to gain a better understanding of what your credit score says about your financial health.

1. Poor Credit (300-579):

Credit scores in this range are a red flag for lenders. They indicate a history of financial missteps, such as missed payments, defaults, or even bankruptcy. Securing credit becomes challenging, and if approved, the interest rates are typically exorbitant. It’s essential to focus on rebuilding your credit by paying bills on time and addressing any outstanding debts.

2. Fair Credit (580-669):

A fair credit score suggests a mixed credit history. While there may be some blemishes, it also shows responsible financial behaviour. You may qualify for certain loans, but the interest rates may still be less favourable. To improve your credit, continue making timely payments and reducing outstanding debts.

3. Good Credit (670-739):

A good credit score indicates a track record of on-time payments and responsible credit use. Lenders consider you a moderate risk, making it easier to qualify for loans with reasonable interest rates. This range opens doors to a variety of financial products, providing you with financial flexibility.

4. Very Good Credit (740-799):

Very good credit scores are a sign of responsible financial management. You’re considered a low-risk borrower, which means you can access a wide range of financial products with excellent terms. Lenders typically offer you lower interest rates, saving you money over time.

5. Excellent Credit (800-850):

The highest credit score range is a testament to your impeccable financial track record. Lenders view you as a highly reliable borrower, and you’re likely to secure the best loan terms and the lowest interest rates available. Excellent credit opens the door to financial opportunities and substantial savings.

Credit Score Ranges in India

Here’s a better representation of the credit score ranges preferred by lenders for giving different types of loans given in India:

Loan Type Preferred Credit Score Range in India
Home Loans
750 and above
Personal Loans
650 and above
Auto Loans
700 and above
Education Loans
700 and above
Credit Cards
750 and above

The Significance of Credit Scores

Credit scores are more than just three-digit numbers; they are the financial compass guiding your monetary decisions and opportunities. Understanding why credit scores matter is key to navigating your financial journey effectively.

  1. Lending Approval: Lenders rely on your credit score to assess your creditworthiness. A higher score increases your chances of loan approval, whether it’s for a mortgage, auto loan, or credit card. Conversely, a low score may result in rejection or less favourable terms.
  2. Interest Rates: Credit scores heavily influence the interest rates you receive. A good score often means lower interest rates, leading to reduced borrowing costs over time. On the other hand, a poor score can result in higher interest rates, increasing the cost of borrowing.
  3. Credit Card Approval: Credit card companies use your credit score to determine your eligibility for their cards. Higher scores may lead to better rewards and perks, while lower scores could limit your card options.
  4. Housing: Landlords and property management companies often check credit scores when reviewing rental applications. A strong credit score can improve your chances of securing your desired rental property.
  5. Negotiating Power: A strong credit score gives you negotiating power when dealing with lenders, landlords, and even utility providers. You can leverage your creditworthiness for better terms and deals.

How to Maintain/Increase Your Credit Score?

It can be challenging to have a low credit score or maintain your credit score if you are a regular borrower. Follow these practical tips to ensure that your credit score never falls beneath the excellent range:

  • Pay your bills on time. This is the most important factor in determining your credit score. Make sure to pay all of your bills on time, including your credit card bills, car loan payments, and mortgage payments.
  • Keep your credit utilisation low. Your credit utilisation ratio is the amount of credit you are using divided by the total amount of credit you have available. A good credit utilisation ratio is 30% or less.
  • Don’t close old credit accounts. Closing old credit accounts can lower your credit score. If you don’t need an old credit card anymore, you can keep it open and just use it occasionally to keep it active.
  • Get a mix of credit accounts. Having a variety of credit accounts, such as credit cards, instalment loans, and mortgages, can help to improve your credit score.
  • Avoid applying for new credit too often. When you apply for new credit, it can cause a hard inquiry on your credit report. Too many hard inquiries can lower your credit score.
  • Dispute any errors on your credit report. If you see any errors on your credit report, such as late payments or incorrect balances, dispute them immediately.
  • Get your credit reports from all three major credit bureaus at least once a year. You can get your credit reports for free from AnnualCreditReport.com.
  • Read your credit reports carefully. If you find any errors, dispute them with the credit bureaus.
  • Consider using a credit monitoring service. A credit monitoring service can help you track your credit score and report any suspicious activity.

In Summary

Understanding credit score significance is crucial as it influences lending approval, interest rates, housing options, and negotiation power. To maintain or improve your score, focus on timely payments, managing credit utilisation, and monitoring your credit situation regularly. Navigating credit scores wisely will help ensure a successful financial journey.

Amit Arora Finnable

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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