11 MAY, 2022

Your credit score is important when it comes to applying for a loan. A good credit score opens doors to getting better deals and loan offers. However, not everybody has a great credit score. It could be due to reasons like defaults in debt payments, errors in the credit report, multiple hard enquiries, etc. Thankfully, having a low credit score is not the end of the world. To avail a personal loan at lower interest rates, you can take steps to improve your credit score. But first, let us understand what a credit score is and then see how to improve it.


What is a credit score?

A credit score is a three-digit numerical summary of your credit history. Your credit history reflects your creditworthiness and repayment capacity. There are different credit rating agencies such as CIBIL that review your credit history over the last 36 months to determine your credit score. While determining your score, the credit rating agency considers all loans you have previously availed, like home loans, credit cards, personal loans, automobile loans, overdraft facilities, etc. Factors like repayment history, credit utilisation, credit mix, loan enquiries you make, etc., help determine your credit score.


If you have a low credit score, lenders can reject your personal loan application. Even if they approve it, you might have to pay higher interest rates. However, there are some ways to improve your credit score.


How to improve your credit score?

  • Pay your dues on time

Often the hardest blow to your credit score is the late payment of your dues. Be it credit card bills or loan’s Equated Monthly Instalments (EMIs), you must pay them on time to avoid negative remarks on the credit report. Even if you are facing a financial crunch, you must immediately clear your dues as soon as you get money in your account.


  • Do not miss on payments

Automate your payments so that you do not miss paying EMIs on time. Similarly, you can consolidate multiple debts into one if you have multiple credit card loans and personal loans. You can pay them off at a uniform interest rate. However, if you cannot consolidate them, you must strive to pay the debt with the highest interest rate first.


  • Maintain a low debt-to-income ratio

Credit bureaus also look at the debt-to-income ratio before determining your credit score. You must maintain a low debt compared to your income. Experts suggest keeping the EMI amount at 30% of your salary. Borrowing more than that can impact your repayment capacity and impact your credit score.


  • Do not apply to multiple lenders

If you apply to multiple lenders simultaneously, it can indicate that you are financially unstable and in desperate need of money. Make lesser loan enquiries and avoid applying for more loans until paying the previous loan.


Your credit score is a crucial determinant for the lender to decide your loan amount and interest rates. Therefore, you must ensure to maintain your credit score and avoid making any credit mistakes. The aforementioned tips can help improve your credit score and get the best interest rates when applying for personal loans


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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.