When you apply for any type of loan—be it a personal loan, home loan, business loan, loan against property, or used car loan—the very first thing lenders check is your credit score. It is one of the most important factors that decides whether your loan application will be approved or rejected.
In today’s financial world, where banks and NBFCs are becoming more cautious in lending, your creditworthiness plays a critical role. A good credit score not only increases your chances of approval but also helps you get lower interest rates and better loan terms.
In this article, we’ll explain:
- What a credit score is
- How it is calculated
- Minimum score required for different types of loans
- How credit score impacts loan approval
- Ways to improve your credit score
- Common myths about credit scores
Let’s dive in.
What is a Credit Score?
A credit score is a three-digit number that reflects your creditworthiness, i.e., how reliable you are when it comes to repaying borrowed money.
In India, the most widely used score is the CIBIL score, which ranges between 300 and 900. The higher your score, the better your chances of getting a loan.
- 750 – 900: Excellent – Very high chances of loan approval at the best interest rates
- 700 – 749: Good – Good chances of approval, but terms may vary
- 650 – 699: Average – May get approval with higher interest rates
- 550 – 649: Poor – High risk, most lenders will reject
- 300 – 549: Very Poor – Very low chances of approval
How is Credit Score Calculated?
Credit bureaus like CIBIL, Experian, Equifax, and CRIF Highmark calculate your score based on your financial history. Some major factors include:
- Payment History (35%)
- Whether you pay your EMIs and credit card bills on time.
- Even a single missed payment can lower your score.
- Credit Utilization Ratio (30%)
- How much of your credit limit you use.
- Keeping usage below 30% is ideal.
- Length of Credit History (15%)
- Older accounts build trust and stability.
- The longer your credit history, the better.
- Credit Mix (10%)
- Having both secured (home loan, car loan) and unsecured loans (personal loan, credit cards) is healthy.
- New Credit Inquiries (10%)
- Every time you apply for a loan, lenders check your credit (hard inquiry).
- Too many inquiries in a short time hurt your score.
Minimum Credit Score Required for Different Loans
Different loans have different eligibility criteria. Here’s a quick guide:
- Personal Loan: 700+ is preferred, but some NBFCs may approve with 650+ at higher interest.
- Home Loan: 720+ is ideal, though government schemes may allow 650+.
- Business Loan: 700+ with strong financials.
- Loan Against Property: 700+, as it’s secured, but banks still prefer higher scores.
- Used Car Loan: 650+ may work since it’s partly secured.
- Credit Card: 750+ is best for premium cards.
How Credit Score Affects Loan Approval
Here’s how your credit score impacts your loan approval process:
1. Loan Approval Chances
- High credit score → More lenders willing to lend.
- Low score → Rejection is likely.
2. Interest Rates
- High score → Lower interest rates (you are seen as low-risk).
- Low score → Higher interest (you are seen as risky).
3. Loan Amount Sanctioned
- Higher score → Higher loan eligibility.
- Lower score → Lenders may restrict the loan amount.
4. Faster Processing
- With a good score, approvals are quick since banks trust your repayment ability.
- With a poor score, banks ask for more documents, guarantors, or collateral.
5. Negotiation Power
- Borrowers with excellent scores can negotiate better loan terms.
- Low score borrowers have little to no bargaining power.
Real-Life Example
Suppose two people apply for a personal loan of ₹5,00,000:
- Rahul (Credit Score 780): Gets approval at 11% interest with 5 years tenure.
- Amit (Credit Score 620): Gets approval only at 18% interest with shorter tenure.
👉 Rahul pays ₹1.5 lakh less in total interest compared to Amit just because of his higher credit score.
How to Improve Your Credit Score
If your score is low, don’t worry—it can be improved with consistent efforts. Here are some proven tips:
- Pay EMIs and Credit Card Bills on Time
- Set reminders or enable auto-pay.
- Even one late payment can drop your score.
- Keep Credit Utilization Low
- Use less than 30% of your credit limit.
- If your card limit is ₹1,00,000, keep spending below ₹30,000.
- Avoid Frequent Loan Applications
- Too many hard inquiries in a short span look risky.
- Apply only when necessary.
- Maintain Old Accounts
- Don’t close old credit cards.
- Longer history = better score.
- Diversify Your Credit
- A healthy mix of secured and unsecured loans is good.
- Check Credit Report Regularly
- Sometimes errors or outdated data can reduce your score.
- Dispute and get them corrected.
Myths About Credit Score
❌ Myth 1: Checking my own credit score lowers it.
✅ Truth: Soft inquiries (self-check) do not affect your score. Only bank checks (hard inquiries) impact it.
❌ Myth 2: Earning more improves my score.
✅ Truth: Income does not affect score directly. Repayment discipline does.
❌ Myth 3: Closing credit cards improves score.
✅ Truth: Closing old accounts reduces your credit history and may hurt your score.
❌ Myth 4: Paying only the minimum due on credit cards is fine.
✅ Truth: It increases your debt and interest, negatively affecting your score.
Final Thoughts
Your credit score is your financial reputation. It tells lenders whether you can be trusted with money or not. If you have a good score (750+), you can enjoy:
- Faster loan approvals
- Lower interest rates
- Higher loan amounts
- Better repayment terms
If your score is low, don’t lose hope. Start by paying bills on time, managing debt smartly, and avoiding unnecessary loans. Within a few months, you’ll see improvements.
At Wealth Crafts Solution, we help customers find the right loans—whether it’s a personal loan, home loan, business loan, loan against property, used car loan, or insurance solutions. Our experts guide you at every step so that your credit score never becomes a barrier to fulfilling your financial goals.