Planning to take out a loan for that favorite car you’ve ever thought of buying, or that house you’ve always imagined, or that business you’ve wanted to expand, it would take you on a trip to the banks’ guide, make inquiries, consider the best quote and interest rate that is being offered to you, and ultimately decide which option is best for you in terms of term, interest rate, processing fees, and prepayment fees. Now the point is, how does a bank or non-bank financial institution set the rate of interest? or other fees? What are the criteria?
Suppose you go to a bank with your friend. They both earn almost the same amount, they are the same age and their family background is similar. And they both apply for the same loan from the same bank. However, an interest rate of 11.5% was offered, while your friend was offered an interest rate of 10.25% with small minor processing fees and advance fees.
You’d never done a CIBIL Score Check before. Which is one of the major factors of the interest rates being processed? Lowering the Free cibil score check more is the interest rate and vice-versa. The credit score ranges from 300-to 900. Where 300 is the lowest and 900 is the highest. Any score beyond 750 is considered a good score. People below this score are considered red zoned, and the ones above 750 are greed zoned. It’s not that, if you have a score below 750 you will not get a loan, but the % of interest will be higher. Now let us take into consideration why the score is low or high? Essentially, what are the factors that influence the score? There are 5 factors whose combination results in the score.
- Payment History (35%)
Payment history is the most important factor in determining your free cibil score. It is beneficial to have a diverse range of credit. How organized you are when making payments on the loans you take out shows how responsible you are. Banks can take note of your past payments and decide whether or not it is an asset to them. If you have made mistakes with your payments in the past or failed to pay regularly, your score will drop significantly and it will become more difficult for you to get a loan. If the score is not good and you find it difficult to get a loan; In this case, you can try to get loans for bad credit. But ultimately the loss will be yours alone.
- Amount owed (30%)
The total amount you borrow in any form of credit i.e. credit card or loan also has a second important thing that is determined in the score. The amount of revolving credit and fixed credit is the amount owed.
- Length of credit history (15%)
Your credit score is also determined by how long your credit account has been active and how old it is. Some people make the mistake of closing older accounts because they believe they are no longer useful, but this causes a drop in the score. As a result, keep the accounts active.
- Types of Credits (10%)
There are 2 types of credit. Fixed or installment credit and revolving credit with a combination of secured and unsecured credit. The type of credit you have will also contribute to the score. It’s healthy if you have a good mix of all types of credit.
- New Credit (10%)
The new credits you take are also a determining factor in your score. New credit indicates that you are becoming more responsible in terms of repaying your debts. However, do not overdo it, as this will also lower your score.
Always manage the credits you take responsibly. If you check your score and believe there is an error, request a detailed report and double-check. Work with it diligently and patiently to get your score in the green!