How credit scores can make or break your chances of securing a loan

A higher credit score not only improves the chances of loan approval but also determines the interest rate and repayment terms offered by the lender. Lenders such as banks and NBFCs share repayment information with credit information companies, which calculate the score. This score significantly influences loan accessibility and affordability.

It is, therefore, important to understand what a credit score is, how it is decided, and what you can do to improve it.

How credit scores help

A credit score is beneficial not only to people seeking loans but also serves as an important tool for lending companies. It is an effective tool to ensure a transparent and efficient lending process.

It has streamlined the entire loan approval process as it is a standardised transparent metric system for evaluating applicants. It helps banks and other financial organisations assess borrowers’ creditworthiness, reduce default risks, and enable informed decisions on loan approvals, interest rates, and credit limits.

Lenders rely heavily on credit scores to determine the applicant’s repayment capacity for loans. This also impacts the loan-to-value ratio and the overall cost of borrowing.

Additionally, credit scores promote financial discipline, encouraging responsible borrowing and timely repayment, thereby supporting long-term financial well-being.

The better your credit score, the higher the chances of getting your loan approved. Borrowers are also likely to get additional benefits such as low interest rates, better repayment terms and a quicker loan approval process.

Factors influencing credit scores

There are several factors that decide how a credit score is calculated. Some of them are:

History of payment: This is decided by the applicant’s credit transactions, outstanding amounts, repayment timing, and the length of credit borrowing (measured from the oldest credit account’s opening date).

Credit utilisation: This is the ratio of the amount of credit used to the credit limit. A lower utilisation indicates better credit management.

Number of newly opened and terminated accounts: Creating a new account reduces the average age of your existing credit accounts, which can lower your credit score overall.

Outstanding debt: You should always make sure to clear your outstanding debt. When you have unpaid dues reflected on your credit report, it takes a toll on your score. It is advised to pay off the outstanding dues even if the amount is small.

Credit mix: Your score will probably rise if you have a good balance of unsecured (such as credit cards) and secured (such as home loans) credit.

How to build a good credit score

A low credit score can be improved by maintaining financial discipline. Additionally, the following steps will help:

Ensure your credit card and loan payments are paid on or before time. This can be done easily by setting reminders.

To keep your credit history clean, keep your previous credit cards in good standing.

Monitor your spending by keeping an eye on your credit card limit. Do not exceed the limit.

Take loans from various credit lines for better interest rates and bigger loan amounts.

Choose a lengthier loan repayment period.

Before taking out another loan, pay off the current one.

How to monitor credit scores

With various tools and services now available, monitoring and improving credit scores have become much simpler. Credit bureaus such as CIBIL, Experian, Equifax and CRIF High Mark offer detailed credit reports that allow individuals to check their scores periodically.

Most financial institutions also provide free or subscription-based credit score monitoring services, often with real-time alerts for changes in credit activity. Additionally, many financial apps help manage timely EMI and bill payments, track expenses, and optimise credit utilisation.

Almost every financial institution in India also provides educational and informative resources to guide borrowers on responsible credit behaviour, ensuring sustained improvements over time.

Conclusion

Maintaining a good credit score is crucial for securing loans on favourable terms and ensuring financial stability. A high credit score enhances loan eligibility, reduces borrowing costs, and enables better financial planning.

By adopting responsible credit habits such as timely payments, maintaining a healthy credit mix, and monitoring credit utilisation, individuals can effectively manage their credit health and achieve long-term financial goals.

Karamjeet Singh is Lead – Credit Policy, HDB Financial Services