A personal loan, whether through offline or online route, has the same features i.e., is disbursed quickly, comes with no security requirements, and can be used for any purpose. Like personal loans of both routes have the same features, the impact of both on your credit score are same too.  While it is common knowledge that holding an excellent credit score of 750 and above allows you to avail a personal loan with ease, the inverse is also true. Wise and responsible usage of personal loans allows you to improve your score. Read on to understand all about credit score and how you can build it.

  • What is a credit score?

A credit score is a three-digit representation of your credit behaviour, which ranges anywhere between 300 and 900 where 750 and above is looked upon as a good score. Whenever you place an application for a personal loan or any other credit option, your credit report is fetched by the lender to study your credit behaviour and accordingly decide your personal loan eligibility. A higher credit score means your chances of availing a loan are higher too and vice versa. So, if you are one of those who may require availing a personal loan through the digital route to meet monetary mismatches, then ensure to start with your journey of maintaining a good score right away as building a score requires time and patience.

  • Major parameters that form your credit score and determine your loan eligibility

Timely credit card and loan repayments

This is one of the major parameters factored in by lenders. A healthy repayment history shows that you are a credit-disciplined individual who always ensures to repay the dues in full and on time. This habit results in an increased credit score, which enhances the lenders' trust in you and as an outcome, they tend to approve your loan application.

Your credit utilisation ratio (CUR)

CUR is the credit limit used by you on the overall credit limit available to you. It is recommended to keep your CUR at 30 per cent. So, the lower your CUR, the better it is for your credit score.

Your Overall Debit

The next parameter that lenders factor in before providing you with the loan is your overall debt. If you are one of those with a heavy debt profile, then your chances of availing a personal loan or any other loan would be lower owing to your reduced repayment potential.

Mix of Credit

It is recommended for you to keep a balanced mix between your secured and unsecured credit options. Higher dependency on unsecured credit options may make you appear as an individual who is credit hungry, which may discourage the lender to approve your loan application. 

Once you avail a personal loan, your duty of ensuring to maintain a good credit score does not end here. You must ensure to timely repay your personal loan EMI in full by the due date throughout the repayment tenure. Doing so allows you to keep your credit score intact and build your credit history over time, which makes you an eligible candidate for future credit options.

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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.