The eligibility criteria for individual personal and business loans differ from one lending institution to another. Each lending institutions evaluate the ability of borrowers to repay the loans based on a number of factors. But no lender provides credit to a borrower without checking his credit score. In simple words, credit score can be defined as a three digit number that depicts the borrower’s creditworthiness. Lending institutions use credit score as a key metric to decide if borrowers can repay the loan and measure amount of credit risk. Hence everyone should understand the importance of credit score, the credit score range in India and the required score needed to qualify for loans.
Hence, an individual’s personal credit score determines if he will qualify for specific loan products. Also, the three-digit numerical expression decides the amount of credit, rate of interest, and terms of lending. Hence, it becomes essential for each person to understand and assess his personal credit score. The Reserve Bank of India (RBI) has authorized four credit bureaus – CIBIL, Equifax, Experian and Highmark – to issue personal credit scores. The credit bureaus allow individuals to apply for and receive their personal credit scores over the internet.
Understanding the Credit Score Range in India
Most banks and NBFCs measure an individual’s eligibility to avail credit and ability to repay the debt is determined by the CIBIL TransUnion Risk Score. The commonly accepted credit score in India ranges from 300 to 900. The lending institutions consider a borrower credit-healthy if his personal credit score ranges from 800 to 900. Credit score over 800 makes it easier for borrowers to negotiate for lower interest rate and extended repayment period.
On the other hand, the lending institutions generally do not provide unsecured business loan and personal loan products to borrowers with less than 800 credit score. Many lenders even reduce credit risk by charging interest at a higher rate if the borrower has a personal credit score less than 800. However, the credit scores below 800 can also be divided into three broad categories – good, average and bad. Hence, it is important for each individual to understand if his personal credit score is excellent, good, average, or poor before applying for a loan product.
Excellent Credit Score:
The lending institutions consider credit score over 800 as excellent. Borrowers with credit score ranging from 800 to 900 can choose from a wide range of unsecured loan products. Excellent credit score will enable them to negotiate for extended repayment tenure and lower rate of interest.
Good Credit Score:
The financial institutions consider credit score in range of 650 to 800 as a good credit score. The good credit score indicates that the borrower repays his debts fully and timely. Also, he utilizes amount of credit available to him fully. But his credit score does not exceed due to one or two missed repayments. The borrowers provide unsecured credit to borrowers with good credit score, but they charge interest at a higher rate to cover the credit risk.
Average Credit Score:
If credit score ranges from 500 to 700, financial institutions consider the borrower to have an average credit score. The average credit score will make it difficult for the borrower to avail unsecured and conventional loan products. But the individual can easily improve the average credit score by paying loan EMIs and credit card bills on time. Likewise, he can improve the average credit score by using a variety of loan products simultaneously.
Poor Credit Score:
An individual’s credit score is considered to be poor or bad if it is less than 500. The credit score below 500 indicates that the person is not able to repay his current debts in full and on time. No lending institution provides credit to borrowers who have poor credit score. But there are a number of lending institutions that provide credit to secured loans to borrowers with poor credit score by charging a much higher rate of interest and imposing stricter terms of lending.
However, each individual must remember that the credit bureaus calculate his personal credit score based on a number of factors. Also, the personal credit score keeps changing from time to time. An individual can easily improve credit score by repaying debts timely and fully. Here are small tips on how to maintain and improve your credit score. On the other hand, any non-payment or delayed payment of debts will bring down the personal credit score. In case of entrepreneurs, personal credit score will also impact the business. Hence, it is always important for individuals to work on improving their personal credit scores to increase chances of availing unsecured personal and business loans.