Having a good credit score is crucial when applying for a large loan like a loan of 5 lakh. A healthy credit score not only increases your chances of loan approval but also helps you secure better interest rates. If your credit score is not where it should be, you can still take steps to correct it. In this guide, we’ll discuss easy and effective ways to boost your credit score to qualify for that loan.
Your credit score is a kind of number that shows your creditworthiness. Lenders make the use of this score to show your ability to repay the loans. A high score shows that you have a correct history of managing credit, and a low score can suggest otherwise. Credit scores typically range between 300 and 900 in India. For a 5 lakh loan, it's ideal to have a score above 750. The first step to improving your score is understanding how it’s calculated, which involves your payment history, credit utilization, and length of credit history.
One of the most important factors in your credit score is your payment history. If you have unpaid debts, try to clear them as soon as possible. This includes credit card balances, old loans, and even small debts like utility bills. Paying off outstanding dues will positively impact your score. If you're unable to pay in full, at least make the minimum payments on time. Consistently paying bills on time shows lenders that you are responsible with your credit.
The credit utilization ratio is the percentage of your total credit limit that you are using. It’s recommended to keep this ratio below 30%. For example, if your credit card has a limit of ₹1 lakh, you should try to keep your spending below ₹30,000. If your credit utilization is high, it suggests you are over-reliant on credit, which can hurt your score. To lower this ratio, you can either reduce your spending or request a higher credit limit from your card issuer.
Every time you apply for a loan or a credit card, lenders perform a “hard inquiry” on your credit report. Too many hard inquiries in a short period can lower your credit score. Therefore, if you’re planning to apply for a 5 lakh loan, avoid applying for other types of credit beforehand. Instead, focus on maintaining your current credit accounts in good standing.
Errors in your credit report can sometimes drag down your score. It’s a good practice to review your credit report regularly to spot any mistakes. You can access your credit report for free from credit bureaus like CIBIL. If you find any discrepancies, you can dispute them and get them corrected, which could improve your score.
Improving your credit score takes time and patience, but the benefits are well worth the effort. By following these tips, paying off debts, lowering your credit utilization, avoiding new credit applications, checking your report for errors, and keeping old accounts open, you’ll increase your chances of securing a loan of 5 lakh. And when the time comes to apply, consider using an instant personal loan app for quick and easy access to funds.