In India, millions of people take out personal loans every year for various needs like education, buying a house, or even starting a business. 

According to a report by Experian, credit scores have significantly increased across all generations, from Gen Z to the Silent Generation (age 74+), highlighting a positive trend in financial management.

Let’s imagine Ravi, a 28-year-old, wants to buy a new car. He applies for a car loan to help with the cost. However, his loan application is rejected because his credit score is low. On the other hand, Priya, who has been careful about her finances, gets her loan approved with ease at a low interest rate.

Why does this happen? The answer lies in the credit score.

What is a credit score?

A credit score is a number that helps banks and lenders understand how risky it is to lend you money. It ranges from 300 to 900. The better your credit score, the easier it will be for you to get a loan.

Here’s how it works:

 Why is Your Credit Score Important ?

• Loan Approval: Lenders use your credit score to assess loan approval. A higher score increases the chance of timely repayment, while a low score, like Ravi’s, may result in rejection or stricter terms.

• Interest Rates: Your credit score impacts the interest rate on your loan. With a high score like Priya’s, you’ll likely secure a lower rate, saving money over time. For instance, Priya might pay 10% interest on her car loan, while Ravi could pay 15%, resulting in thousands of rupees in extra costs.

• Loan Amount & Terms: A higher credit score can help you borrow more money, with better terms like larger loans, lower fees, and longer repayment periods.

• Negotiation Power: A good score gives you the power to negotiate lower interest rates and smaller processing fees.

How to Improve Your Credit Score

If you want to apply for an SBI personal loan in the future, here’s how you can improve your credit score:

• Pay Bills on Time: Paying bills and debts on time is crucial for improving your credit score.
• Use Less Credit: Try to use less than 30% of your credit limit on credit cards. If you have a credit card limit of ₹ 50,000, it’s best to use no more than ₹ 15,000 at any time.
• Avoid Too Many Loan Applications: Each loan application slightly lowers your score, so it’s best to limit the number of applications.
• Check Your Credit Report: Errors in your credit report can affect your score, so report any mistakes you find immediately.

A Simple Example to Understand

Let’s think about Ravi and Priya again.

Ravi’s credit score is 600, while Priya’s is 750. Ravi missed credit card payments and has high credit usage, while Priya pays bills on time and uses credit wisely. When applying for a car loan, Priya gets approved at 10% interest, while Ravi faces rejection or a higher 15% interest.

Facts : 

According to a report In CY 2022, 8.2 million women accessed their credit score, a 44% increase from 5.7 million in 2021.

The ‘CIBIL for Every Indian’ report stated that between October 2021 and September 2022, 47% of self-monitoring consumers upgraded their credit score.

Conclusion 

It’s like a financial report card. A higher score shows you manage your money well, making banks trust you more. To improve your score and get better loan terms, pay bills on time, use less credit, and keep a clean credit history. Like Priya, who secured a great loan deal, you can achieve your financial goals with a good score.

By following these steps, you can be on your way to getting your personal loan approved with better terms and lower interest rates!