Individuals applying for education loans, personal loans, or any other loans must know the importance of good credit as it helps with easy and high loans. In addition, having a decent credit score enables a borrower to get a credit card readily. Furthermore, low-interest rates on loans and credit cards also drive people to maintain a favourable credit score. However, to benefit from a positive credit history, it is essential to understand the key concepts of credit. Moreover, it is also vital to be aware of the credit report and good credit score before applying for any financial aid/education loans from banks and NBFCs.
Keep reading the blog to understand all the key components of credit and its importance.
Table of contents
- What is a Credit Score?
- Importance of Good Credit
- Importance of Good Credit for Availing Education Loan
What is a Credit Score?
To analyse the importance of good credit, it is imperative to understand key concepts of credit score. A credit score is a numeric rating that summarizes your credit history and the level of risk you pose to lenders. If you have used a credit card, taken out a loan, or made purchases through instalments, you will have a credit report and score. When you seek a loan, the bank or lender examines your credit score and reports to evaluate the risk you present. This risk assessment helps them gauge your ability to repay the loan punctually. Using this data, they determine whether to approve your loan application or not.
Credit Bureaus in India
4 credit bureaus in India are responsible for tracking your credit score. These bureaus are as follows:
- Credit Information Bureau India Limited (CIBIL)
- High Mark
CIBIL TransUnion Score
Before we understand the importance of good credit score, let us know about CIBIL TransUnion Score. It is a three-digit numerical value designated as your credit score. This score is provided by CIBIL. This score spans from 300 to 900 and holds a pivotal function in the approval of your loan. Should your score gravitate towards 300, lenders might perceive you as a substantial risk and reject your loan application. Conversely, if your score leans closer to 900, your application procedure is likely to be smooth, allowing you to bargain for improved interest rates.
Also Read: What is a Student Line of Credit?
A credit report is a detailed record of your financial history, including credit card usage, loans, and payment patterns. It is used by lenders to assess your creditworthiness when considering loan applications. The information in your credit report includes:
- Personal Information: This section includes your name, address, birth date, employment details, and PAN.
- Credit History: It lists your financial accounts, showing the account opening date, credit limit, balance, and payment track record.
- Public Records: Records of foreclosures, legal actions, and judgments are documented here.
- Enquiries: Any past instances where creditors checked your credit report are noted in this section.
Evaluation of Credit Score
Based on your credit report, the lender determines your credit score and sanctions loans accordingly. This, in turn, makes you realise the importance of good credit. Your credit score is assessed based on:
- Payment Record: Delays or bankruptcies can influence your score negatively.
- Debt Amount: Your owed balances and credits are considered; exceeding credit limits harms your score.
- Credit History Duration: A longer credit history is advantageous.
- Recent Credit: Applying for new credit indicates risk; numerous requests in a short period heighten lender concern.
- Credit Variety: Your credit accounts and instalment-type accounts are examined. A varied credit mix can enhance your score.
What is a Good Credit Score?
In India, a good credit score generally ranges from 750 to 900. CIBIL Scores closer to 900 are considered excellent and demonstrate strong creditworthiness. Having a credit score above 750 is important for accessing favourable loan terms, lower interest rates, and smoother approval processes for various financial products. It reflects responsible financial behaviour and enhances your ability to secure loans and credit cards with attractive terms.
Importance of Good Credit
Maintaining a high credit score enables you to avail of easy and low-interest-rate loans and credit cards. A standard CIBIL history also allows you to avail yourself of a high loan amount.
Thus, to understand the importance of good credit, let us view the key advantages of a good credit score.
Improved Chances of Loan and Credit Card Approval
Primarily, having a high credit score is not the sole factor lenders consider when reviewing loan or credit card applications. However, a high score suggests responsible credit behaviour, on-time repayments, and reduced risk for the lender. This improves your likelihood of getting approved for a loan or credit card.
Interest rates on Loans and Credit Cards
Furthermore, a strong credit score often leads to lower interest rates on various types of credit, such as personal loans, home loans, and credit cards. Lenders are more likely to offer you credit at a reduced interest rate due to your high credit score.
Better Access to Pre-Approved Loans
In addition, another importance of good credit is increased access to pre-approved student loans and student credit cards. These offers can be availed through FlyFinance as it streamlines the credit approval process with minimal documentation and quicker approval times.
Moreover, with a good credit score, you will find it easier to get approved for premium credit cards. Lenders often assess an applicant’s credit score before approving credit card applications. This can grant you access to credit cards that offer better rewards like reward points, cashback, and premium services.
Availability of Higher Limit Credit Cards/Education Loans/Other Loans
Additionally, a high credit score boosts your chances of being approved for higher loan amounts or credit card limits. Lenders are more comfortable providing larger credit limits to individuals with responsible credit habits, as a higher credit score indicates a lower default risk.
Probability of Obtaining a Long Tenure Student/Other Loans
Finally, a favourable credit score might enable you to secure longer repayment tenures for loans. Despite the increased risk associated with longer loan terms, a good credit score could result in extended repayment periods. This leads to smaller Equated Monthly Instalments (EMIs), reduced monthly financial strain, and better management of monthly expenses.
Importance of Good Credit for Availing Education Loan
Maintaining a good credit score is vital for a successful education loan application and to ensure a financially stable academic journey. Here are important reasons why:
- A higher credit score increases your chances of loan approval as it reflects your creditworthiness and ability to repay the loan on time.
- In addition, a good CIBL score can help you secure lower interest rates on your education loan, resulting in lower overall repayment costs.
- Furthermore, lenders may be more willing to offer a higher loan amount to applicants with a good credit score, ensuring you can cover your educational expenses adequately.
- Moreover, with a strong credit history, you might not need a cosigner for your education loan, making the application process smoother.
- Besides, a higher credit score can lead to more favourable terms and conditions, such as longer repayment periods and reduced prepayment penalties, making loan management easier.
Ans. Some of the key benefits of having a favourable credit score are Improved Chances of Loan and Credit Card Approval, low interest rates on Loans and Credit Cards, Availability of Higher limits on Credit Cards/Education Loans/Other Loans, and Probability of Obtaining Long-term Tenure Student/Other Loans.
Ans. In India, a good credit score generally ranges from 750 to 900. Scores closer to 900 are considered excellent and demonstrate strong creditworthiness.
Ans. CIBIL, High Mark, Equifax, and Experian are chief credit bureaus in India.