Taking a gold loan has become an increasingly popular way for many Indians to access quick funds in times of financial need. With gold loans, you can get a loan against your gold jewellery without having to sell it. This allows you to retain your precious assets while getting the cash you need.
But one common concern when taking a gold loan is - how does it impact your credit score? Your credit score is an important factor that financial institutions consider when approving any kind of loan or credit facility. A high credit score increases your chances of getting a loan easily, while a low score can lead to loan rejection.
So, how exactly does availing a gold loan affect credit score? Let's find out.
What is a Credit Score?
Before we understand the impact of a gold loan, let's first understand what a credit score is and why it is important.
A credit score is a three-digit number that summarises your credit history and performance. It gives loan companies an idea of your creditworthiness and your ability to repay loans.
In India, credit scores range from 300 to 900, with 900 being the highest. Generally, a credit score above 750* is considered excellent and easily improves your chances of getting loans and credit cards.
Your credit score is calculated based on several factors, such as your repayment history, credit utilisation ratio, types of loans taken, credit history length, and mix of credit types. Timely loan repayment leads to a higher score.
Therefore, maintaining a healthy credit score should be every individual's priority. Let's now understand how a gold loan is related with credit score.
How Does Availing a Gold Loan Impact Your Credit Score?
When you avail a gold loan, it adds to your existing debt obligations. However, the impact on your credit score depends on how you handle the loan. Here are the key factors:
Repayment History
This is the most crucial factor determining your credit score. If you make timely repayments on your gold loan's EMIs, it will maintain your score. However, if you frequently miss EMI payments or delay repayments, it can drastically reduce your score. Lending institutions report your repayment behaviour to credit bureaus like CIBIL. A high number of missed or delayed payments is viewed negatively and reduces your creditworthiness.
Loan Amount
Gold loans are relatively easy to obtain as financial institutions carry lower risk by keeping your gold as collateral. Many people tend to take excessive loans beyond their repayment capacity in urgent situations. However, having a large outstanding gold loan amount adds to your debt obligations. This impacts your credit utilisation ratio, accounting for 30% of your credit score calculation. To minimise the impact on your score, try to avoid taking very large gold loans and maintain a healthy credit utilisation of less than 30%.
Credit Mix
Loan companies prefer to see a diverse credit mix rather than a portfolio concentrated on only one type of loan. If you already have several other loans like home loans, auto loans, credit cards, etc, taking a gold loan as well shows financial institutions your ability to manage different credit types well. However, if the gold loan is your first major credit facility, it may not boost your score significantly as lending companies look for a varied mix. However, it still helps build your credit history if managed prudently.
New Credit
When you apply for a new loan facility, it results in a hard inquiry on your credit report. Multiple loan applications within a short span could lead to several hard inquiries, which are viewed negatively while computing your score. Therefore, avoid taking multiple back-to-back gold loans and space them out to prevent excessive hard inquiries. Also, try prepaying your existing gold loan before taking a second one.
Credit History Length
Your credit score takes into account the length of your overall credit history across products. The longer your history, the better is your score as it demonstrates experience in managing credit responsibly over time. If the gold loan is one of your first borrowings, it will help build your history which is favourable for your score in the long run. Thus, make sure to maintain a good record.
Tips to Protect Your Credit Score When Taking a Gold Loan
Here are some tips to ensure availing a gold loan does not adversely impact your credit score:
- Check your credit score beforehand to assess loan eligibility and avoid rejections.
- Take only the loan amount you can comfortably repay within the tenure.
- Set up standing instructions or auto-debits so you never miss an EMI payment.
- Prepay some loan amount if possible - it gives a credit utilisation boost.
- Avoid loan defaults as they severely hit your score and loan provider’s trust.
- Track your score every quarter to review the impact and take corrective action.
- Limit hard inquiries by spacing out new loan applications by a 6–12-month gap.
The Bottom Line
The good news is that gold loans, when managed properly, can actually help build your credit score, unlike excessive unsecured loans. Timely repayments help establish a good track record with lending companies and add to your credit mix diversity.
So, by being a responsible borrower and maintaining repayment discipline, you can ensure availing a gold loan has a positive impact on your credit score. Use the loan judiciously for productive purposes and reap the dual benefit of both quick funds and credit score enhancement.
FAQs
1. How soon does taking a gold loan impact my credit score?
Taking a gold loan does not impact your credit score as they are backed by the gold itself. However, failure to repay of the loan within the stipulated due date will impact your credit score.
2. Will closing a gold loan help improve my credit score immediately?
No, closing a gold loan account does not have an instant positive impact on your credit score. The closed loan remains on your credit report for many years and continues to impact your score based on your repayment history.
3. I have defaulted on my gold loan EMI. How badly does it affect my credit score?
Defaulting on any loan repayment, including a gold loan, can drastically reduce your credit score by 100 points or more. It signifies high credit risk to financial institutions.
4. How long does a default on a gold loan account stay on my credit report?
Defaults remain on your credit report for 7 years from the date of the first missed payment. However, you can get defaults removed earlier by paying off the overdue amounts.
5. Will my credit score improve if I pay off my gold loan before the tenure ends?
Yes, prepaying your gold loan can improve your credit score by reducing your outstanding loan obligations and credit utilisation ratio.
