Applying for a personal loan? Your credit report plays a huge role in determining whether your loan application will be approved or rejected. A good credit score significantly improves your chances of getting a loan approved on favourable terms. On the other hand, a poor credit score can lead to loan rejection or higher interest rates. Let's understand in detail the importance of credit report in personal loan approval.
What is a Credit Report?
A credit report is a detailed record of your credit history prepared by credit bureaus like CIBIL™, Experian, etc. It provides information on your existing loans, credit cards, and other credit facilities. The report includes data on:
How Does It Differ from Credit Score?
While your credit report and credit score are related, they are not the same. Your credit report is a detailed record of your credit history and includes information on your loans, credit cards, payment history, inquiries, etc.
Your credit score, on the other hand, is a three-digit number that summarises your creditworthiness based on the information in your credit report. It represents your credit risk profile on a scale of 300 to 900.
A good credit report may not necessarily mean a high credit score. For instance, your report may show multiple credit card accounts in good standing, but high outstanding balances can pull down your credit score. Or you may have a short two-year credit history with limited data, leading to a lower score despite a clean report. Your lender reviews both your credit report and score to make a holistic decision.
A healthy credit report ensures your credit score can improve over time. In turn, a higher credit score means you are likely to get approved for credit based on your health report. So, while they are distinct, your credit report and score share a symbiotic relationship in influencing your loan approvals.
Importance of Credit Report in Personal Loan Sanction
When you apply for a personal loan, financial institutions will request a copy of your credit report to evaluate your application. They use the information in your credit report to assess the risk of lending money to you and determine if you are likely to repay the loan on time and in full.
The credit report plays a crucial role in the personal loan sanction process. Here's a concise overview of the importance of a credit report in personal loan:
- Risk assessment: Financial institutions use credit reports to evaluate your creditworthiness and likelihood of repayment.
- Credit score: The credit score is a key component of the credit report and a numerical representation of creditworthiness.
- Payment history: Shows past payment behaviour, indicating reliability in repaying debts.
- Existing debts: Reveals current financial obligations, helping financial institutions assess debt-to-income ratio.
- Credit utilisation: Indicates how much of available credit is being used, affecting perceived financial stability.
- Loan terms: Influences interest rates, loan amount, and repayment terms offered.
- Quick decision-making: Allows financial institutions to make faster loan approval decisions.
- Fraud detection: Helps identify potential fraudulent activities or discrepancies in the application.
Tips to Improve Your Credit Report
Here are some tips on improving your credit report before you apply to get personal loans on credit report:
Tip 1: Review Credit Reports Regularly
You must check your credit reports from Equifax, Experian, and TransUnion CIBIL™ at least a few months before applying for a personal loan. Carefully reviewing the details in your reports gives you adequate time to dispute and correct any inaccuracies that could negatively impact your credit score. Even minor errors can take points off your score, so identify any mistakes in personal info, account history, inquiries, etc.
Tip 2: Pay Down Credit Card and Revolving Debt Balances
High credit card balances, utilisation rates, and revolving debts can hurt your credit score. In the months leading up to your loan application, make an effort to pay down balances on cards and other revolving debts to lower your overall credit utilisation ratio. This can involve making more than the minimum payment and paying off balances.
Tip 3: Avoid New Credit Inquiries
You are applying for new credit, which results in a hard inquiry on your report that can temporarily cause a small drop in your credit score. Avoid applying for too much new credit in the months preceding your loan application. Financial institutions can see too many new inquiries over a short period as a higher risk.
Tip 4: Dispute Any Inaccuracies
If you find mistakes in your report, submit dispute letters to the credit bureaus immediately.
Tip 5: Make Payments on Time
Late payments can significantly damage your credit score. Pay all bills on time to ensure a good credit score.
Conclusion
Your credit report significantly influences personal loan approval and the terms you are offered. Maintaining a high credit score by practising good financial habits over time is critical to qualifying for affordable loan rates and terms. Check your credit reports a few months before applying and take steps to correct any errors or improve your score. With responsible credit management, you can be in a solid position to secure financing for your needs.
FAQs
1. How long do negative items stay on your credit report?
Most negative credit information stays on your report for 7 years, including late payments, collections, and bankruptcies. Hard inquiries typically remain for 2 years.
2. Does getting denied for a personal loan hurt your credit?
Personal loan inquiries result in hard pulls on your credit, which can cause a small temporary drop in your score. Loan denials alone do not hurt your credit if you continue practising good financial habits.
3. Can you get a personal loan with bad credit?
Getting a personal loan with bad credit is possible, but you will likely pay much higher interest rates and have fewer lender options. Taking steps to improve your credit will open up better loan offers. Reputed NBFCs like Shriram Finance offer attractive personal loan options to individuals with lower than market standards credit scores. Check with such loan providers if you have poor credit yet require quick funds.
4. Does checking my own credit report impact the score?
Just viewing your credit report has no impact on your credit score. However, lenders checking your report for approvals is recorded as a 'hard inquiry', which can temporarily impact your score.
5. What is the ideal credit utilisation ratio?
Experts typically recommend keeping your credit utilisation ratio below 30%. This ratio looks at how much of your total credit limit is currently utilised through debt.
6. Can I rebuild my credit score quickly?
There are no shortcuts to drastically improve your credit score overnight. Building it slowly with responsible credit behaviour is the only effective way. Allow at least 6 months of disciplined habits to see noticeable improvement.