Credit Score for Tax Finance

The Indian tax structure is complex, that said large, medium, and small businesses are expected to pay tax in one or more forms. Businesses that need to pay heavy taxes sometimes take a loan for payment of tax to maintain their cash flow. High Net-worth Individuals (HNI) may also need to take a loan if their tax is higher than usual. One of the most significant considerations for approving tax finance or other loans is the credit score.

A credit score is essentially a three-digit number within a range from 300 to 900 that plays a pivotal role in assessing an individual's creditworthiness. Determined by credit bureaus, these scores are derived from a range of elements. These elements encompass credit history, loan repayment track record, instances of default, and credit inquiries. Lenders will first look at your credit score for tax finance approval.

A high credit score shows that you are creditworthy . This can speed up the approval process when you apply for a loan by financial institutions like NBFCs (Non-Banking Financial Companies) and banks. Lenders are willing to offer better loan terms such as lower interest rates if the borrower's credit score is high.

The Reserve Bank of India has authorized certain credit information companies to evaluate credit scores in India. Here is the list of approved credit rating companies as of July 2020.

• Acuite Ratings and Research Limited (erstwhile SMERA Ratings Ltd.)
• Brickwork Ratings India Pvt. Limited;
• CARE Ratings Ltd. (erstwhile Credit Analysis and Research Limited);
• CRISIL Limited;
• ICRA Limited;
• India Ratings and Research Private Limited;
• Informerics Valuation and Ratings Pvt. Ltd.

In January 2023, Brickwork Ratings Limited was dropped from the list. 

Each agency uses a patented and RBI-approved formula to compute credit scores and determine creditworthiness. If you want to know your credit score for tax finance, any of these agencies can provide a credit report. Credit scores are also available online through their website or portal.

Although different agencies use different parameters, in general, this is what the credit scores indicate:

• 301 – 500: A bad credit score reflecting payment delays or defaults, and a poor track record of financial management.
• 501 – 700: A reasonable score suggesting fair financial management with room for improvement.
• 701 – 850: Demonstrating sound financial choices and timely repayments.
• 850 & above: Indicating excellent financial management. Signifying an almost perfect credit history, attracting highly favourable terms.

While there is no required minimum credit score for tax finance, a score of 600, 650 or above is considered good. However, you may still be regarded as creditworthy with a lower score – say 550 – if other parameters like income are satisfactory.

Lenders analyze credit scores to evaluate creditworthiness. This influences eligibility for tax finance and the terms of finance. A robust credit score is more than just a numerical representation of creditworthiness; it is a passport to unlock favorable terms, streamlined approval processes, and substantial savings. Let us get a closer look at some of the advantages of credit scores for tax finance:

If you are wondering what a good credit score for tax finance is, you should know that while there is no mandate for credit scores for tax finance or other loans, lenders view credit scores differently for different types of borrowing. Also, some lenders may favour one credit rating agency over another.

In India, a good credit score is typically defined as a credit score of 701 or above. Credit scores in India are generated by credit bureaus, such as the Credit Information Bureau (India) Limited or CIBIL™, Experian, Equifax, and CRIF High Mark. These scores serve as numerical representations of an individual's creditworthiness and financial responsibility. It's worth noting that not only banks but also Non-Banking Financial Companies (NBFCs) offer credit score checking services. Reputed institutions like Shriram Finance provide options for individuals to access their credit scores and evaluate their credit health. Regularly monitoring your credit score through reputable institutions, including both banks and NBFCs, is essential for maintaining a healthy financial profile and making informed decisions related to credit and financing.

It's important to note that while a good credit score is generally favourable, individual lenders may have their own criteria and preferences when evaluating credit applications. Therefore, it's advisable to maintain a healthy credit history and monitor your credit score regularly to ensure you have access to financial opportunities with favourable terms.

Your credit score has a dual impact on your application for tax finance. First, it is a crucial determinant of loan approval. Lenders favour applicants with good credit scores as the risk of non-repayment of loans is lower. Secondly, your credit score can influence the interest rate you are offered. Loan approval at lowered interest rates is another indicator of good financial behaviour, and this will impact future applications for financing, loans, and credit cards.

Several factors influence your credit score, including your track record of payments, credit utilization, the length of your credit history, the diversity of your credit types, and recent credit inquiries. A consistent history of punctual payments and responsible credit management culminates in a good credit rating, elevating your chances of qualifying for tax finance.

Taking proactive steps to enhance credit scores improves the prospects of securing an income tax loan. Cultivate a habit of punctual bill payments, limit credit card use, and refrain from unnecessary credit applications. Check credit score and credit report regularly. Scrutinize credit reports for inaccuracies. Take swift measures to rectify any discrepancies.

Here is a proposed step-by-step plan to ensure that your credit score always meets lenders' requirements:  

Apart from credit score and income, lenders also consider the purpose of the loan and a few other factors. Before you tender your tax finance application, you should consider certain important factors. Here is a list:

Your credit score is an indispensable compass lenders use to assess your creditworthiness. A strong credit score translates to better loan terms, diminished interest rates and better chances of approval. Disciplined behaviour, responsible spending, and a sharp eye on your finances profoundly impact your credit score.

At Shriram Finance, we recognize the significance of maintaining sound financial well-being. Moreover, you can easily access and monitor your credit scores on the Shriram Finance website or through the Shriram One application, providing you with essential financial insights at your fingertips. We believe that staying informed about your credit health empowers you to make informed financial decisions and achieve your financial goals with confidence.