Amid High Interest Rate Regime, Credit Score Matters More—Know How

Taking out loans has become sharply more expensive over the last few months, with the Reserve Bank of India raising its key interest rate by as much as 250 basis points since May 2022.

The central bank has increased the repo rate as many as six times over the last year to take it to 6.5% now, with expectations of it to rise again. Following suit, commercial banks and non-banking finance companies have almost entirely transferred the increase to their customers, leading to a higher monthly outgo for borrowers.

However, many lenders offer the most competitive interest rates on new loans to customers who maintain good CIBIL or credit scores.

The credit score is a key factor in deciding if a loan will be sanctioned, or determining the rate at which the loan will be offered. And in these times of high interest rates, a borrower can seek some reprieve or negotiate better terms if they have a good credit score.

What Is A Credit Score?

The credit score is commonly known as CIBIL score as it has become synonymous with the company that initially began generating credit scores in India, despite the fact that there are now a number of agencies that compile credit scores.

The CIBIL score is a three-digit number ranging from 300 at the lower end to 900 at the upper end. It is derived by considering a person’s credit and repayment history, particularly over the previous 36 months.

Even if a person does not have a loan but uses one or more credit cards, their score is still determined by how they have used and repaid those cards in the past. Typically, lenders will approve loans with a score of 750 or higher; the higher the score, the better. And a good CIBIL score is essential for any borrower to get the best possible deal for their loan with a reasonable interest rate.

However, in case of a low credit score, the silver lining is that the credit score is dynamic and not a static figure. In layman’s terms, it means that by adopting good practices one can raise their credit score. This might not help in getting a loan right away, but if one plans to take on debt in the future, they can adjust their credit behaviour to improve their credit score.

This can be accomplished in a number of ways, including prepaying some existing loans, particularly unsecured loans like a personal loan, making sure credit card usage is kept to a minimum, making sure monthly minimum payments are made on credit cards, and ensuring that equated monthly installments (EMIs) on existing loans are paid on time.

Importance Of ​​A Good Credit Score

A high credit score is very important for any loan, especially unsecured loans that do not have a collateral attached to them. It has many advantages such as:

Higher Chances Of Loan Approval:

With a high score an applicant is almost certain to have their loan sanctioned. It shows the applicant’s credibility and assures the lender that the borrower is unlikely to default on the loan.

Quicker Disbursal:

A good credit score means the loan application is quickly evaluated for approval and then disbursed because it increasing the lender's level of comfort.

Lower Rate Of Interest:

A borrower with a high score is seen as a lower risk by the lender, who would prefer to persuade the applicant to accept a loan from it rather than looking for a better deal. Higher score holders consequently receive loan offers with lower interest rates.

Getting A Good Deal:

With a high CIBIL score, one benefits not only from lower interest rates but it also allows one to negotiate better terms such as greater repayment flexibility, longer loan terms, and even the waiver of some fees.

Conclusion

Although applications from people with lower CIBIL scores may be taken into account and approved, a CIBIL score of 750 or higher is ideal. As long as a client has a good credit history and no history of missed payments or loan defaults, a good lender can also provide the most affordable interest rates to them.

Therefore, in these times of rising interest rates, the importance of having a good credit score has also increased multifold to get a good deal on a loan.

Well-known lenders like IIFL Finance place a lot of importance on their borrowers’ credit histories. One of the biggest NBFCs in India, IIFL Finance offers a simple and entirely digital application process for most loans including personal loans with minimal paperwork and affordable interest rates.