The interest you actually pay towards your loan depends on your credit score. The higher your credit score, the lower the interest rate and the amount of interest you pay towards the loan. Enhancing your credit score will save you a lot of money payable towards interest.
What Is A Credit Score?
A credit score is a 3 digit number in the range of 300 to 900. It represents your creditworthiness. It shows your ability to repay the credit on time. Any credit score above 750 is considered to be a healthy score. Most lenders will be willing to lend to people who have a credit score of 750 and above. Any score below 720 is considered low and may hamper your ability to acquire credit. There is no single feature which affects your credit score and decides whether it is good or bad. But there is a list of factors. These include
- Credit utilization ratio
- Number of hard inquiries
- Past credit repayments
- Credit mix
- Any settled loan, which is still showing as active even if the payment has been done
- Irregular address details among numerous accounts
- A credit repayment history without defaults
- Amount of debt
- A healthy credit mix of different credit products
- Keeping track of one’s credit card bills
Credit Score and Interest Rates
When you have a good credit score, you will be in a position to negotiate with lenders to get lower interest rates on your loan. There are several lenders who give preferential interest rates to lenders who have a high credit score. If you have a credit score of 750 and above, banks will give you lower interest rates.
For example, here are some banks providing home loans based on your credit score.
|Banks||Interest (%) p.a. for < 700||Interest (%) p.a. > = 700 to < 750||Interest (%) p.a. > = 750 < 800||Interest (%) p.a. > = 800|
|PNB Housing||9.1 to 9.20||8.75 to 8.85||8.6 to 8.70||8.55 to 8.70|
|PSB||9.25 to 9.7||8.9 to 9.35||8.60 to 9||8.6 to 8.7|
|SBI||8.8 to 9.4||8.7||8.6||8.6|
|UCO||8.95||8.95||8.75 to 8.85||8.75 to 8.85|
|Union||9.2 to 10.45||9.1 to 9.30||8.70||8.60|
|BOI||8.90 to 10.6||8.8||8.70||8.60|
|Bank of Maharashtra||9.35 to 10.55||8.25 to 9.2||8.35 to 9.00||8.35 to 8.55|
You can see that the interest rates decrease with increase in credit score for all the lenders. Thus, it is essential to improve your credit score. Let us see how
Tips To Improve Your Credit Score
#1 Pay Off High-Interest Credit Cards And Loans First
Check all your loans and see where you are paying the highest interest. Come up with a financial plan and pay off all your higher interest loans first and fast. This gives you some hold on other debts. You can also use the time obtained to build your credit history. Limit your credit utilization ratio to 30% or less so that you don’t fall into that continual debt cycle.
#2 Do Not Apply For New Credit Or Loans For Some Time
One of the best things you can do is not to apply for any loans or credit cards till you have your credit score fixed. Many people do not realize that every time they apply for a loan or a credit card, their credit score gets impacted. So avoid any new applications if you are trying to improve your credit score.
#3 Timely Payment of EMIs
It is important to pay all your bills and EMIs without defaulting in order to avoid a dip in your credit score. This includes credit card bills, utility bills, and EMIs. Even a single late payment can damage your credit score, so it is important to be alert and not miss out on the payment due date. You can set up auto payment alerts in order to make timely payments.
#4 Seek For Loan Modification With Your Lender
Don’t default on your loan if you are struggling to make your payments. This will only cause your credit score to dip further. Alternatively, speak to your lender and try to renegotiate your loan terms. You can go in for loan modification as it is a great way to improve your credit score and reduce your monthly payments. When you renegotiate the loan terms, you can obtain a lower interest rate, a longer loan tenure or both. This will help you have some free cash flow every month which you can use to pay off other debts.
#5 Check Your Credit Score For Inaccuracies and Discrepancies
Regularly monitoring your credit score is good for your financial health. This way, if there are any errors or omissions from your credit report, you can file it with your credit bureau and get it resolved.
#6 Have a good balance on credit mix
If you have a good balance of secured and unsecured credit, it will help in enhancing your credit score. It is ideal to have one or two credit cards as they are unsecured loans. At the same time, you can take a car loan which is a secured loan.
#7 Increase credit limit on your credit card:
One of the fastest ways to increase your credit score is to request your bank to increase the credit limit on your credit card. You should keep your CUR low within 30% once the credit limit is increased. This will show that you are not credit hungry and are able to handle credit.
If you don’t have a good credit score, it is ideal to wait until your credit score is enhanced. You can postpone your decision to take the loan and work on bringing your credit score closer to 900. Pay off all your pending debts and ensure that there are no outstanding dues. Don’t make late payments since late payments bring down your credit score. Also, before you apply for a loan, browse and choose the best deals on loans.