Strategies for Boosting Your Credit Rating before Seeking a Personal Loan
In India, maintaining a good credit score is crucial for securing personal loans at lower interest rates and faster approval. Here are some strategies to help improve a low credit score and access better loan terms.
Firstly, consistent timely payments of bills, EMIs, and credit card dues are essential for a good credit score. Late or missed payments can significantly harm your credit profile [1][3][5]. To avoid such issues, consider setting up automated reminders or auto-debits for all loans and credit cards [1][3][5].
Another crucial factor in improving a credit score is reducing the credit utilization ratio. This means keeping your credit card usage below 30% of the available limit, as this significantly boosts your score [3][5]. Paying off high-interest loans first can also help reduce the credit utilization ratio [2].
Errors on credit reports can negatively impact a credit score. Checking your credit report for errors and disputing any inaccuracies can promptly raise your score [3]. Approximately 119 million Indians have monitored their CIBIL scores as of March 2024 [6].
Improving a credit score can save a significant amount of money, as demonstrated by the difference in loan costs. For instance, the cost of a ₹20 lakh personal loan with a high interest rate (15%) and a low credit score is approximately ₹47,710 per month, compared to ₹42,494 with a high credit score (10%) [2].
If your credit score is very low (below 600), some NBFCs and fintech lenders like Fibe use alternative credit assessment models and might approve loans at reasonable rates without strictly relying on your CIBIL score [2]. Maintaining a healthy credit score, preferably above 700, increases your loan eligibility and helps you access lower interest rates and faster approval [1][2].
Using secured loans (backed by fixed deposits or gold) can help rebuild credit history if unsecured loans are currently difficult to obtain [4]. In India, a credit score ranges from 300 to 900, with anything above 750 being considered excellent [7]. Getting a secured credit card against a fixed deposit can also help build credit history.
Joining a local financial institution, such as a credit union in Idaho Falls, can potentially help manage debt more effectively due to lower interest rates and more flexible terms [8]. However, applying for multiple loans within a short period can lead to a decrease in credit score by 30-50 points due to hard inquiries [3]. It's recommended to wait at least six months between loan applications to keep the credit score stable [9].
Lenders, such as HDFC or SBI, prefer borrowers with high credit scores as they are considered more trustworthy [10]. Improving a credit score can take between 3-6 months, depending on the issues addressed [11]. Fixing errors on a credit report can lead to score improvement, with examples provided for different error types [3].
In summary, to improve your credit score and get better personal loan interest rates in India, pay dues punctually, lower credit card balances, monitor and correct credit report errors, consider secured loans if needed, and explore alternate lenders if immediate loan access is necessary despite a low score [1][2][3][4][5].
To effectively manage personal-finance, it's advisable to make consistent, timely payments of bills, EMIs, and credit card dues, which are vital for maintaining a good credit score. Maintaining a low credit utilization ratio, ideally below 30% of the available credit limit, is another crucial aspect in improving a credit score.
By improving a credit score through these strategies, significant savings can be achieved in investing in personal-finance, as demonstrated by the difference in loan costs, with lower interest rates leading to less monthly payment obligations.
