What is credit score and do you have it? If you are new to loan world, here's what you need to know

At some point of our life, we need financial funding for various reason. And you must have heard that banks are always guiding you to maintain a good credit score. This one indicator plays a major role in what happens to your loan request. Your credit score helps you determine two things. Firstly, considering that lending money comes with a list of risks, your credit score helps lenders in understanding how reliable and unreliable a customer you are in regard to repayment of debt. Secondly the credit ratings also supports in determining the type of loan that is suitable for you. 

What is credit score? 

A credit score can be referred as a 3-digit number between 300 and 900 which defines the credit merit of a credit card holder or of an individual who has taken a loan.

For sanctioning loan in India, the potential lenders adapt the credit scores calculated by CIBIL TransUnion, Experian, Equifax or CRIF High Mark.

CIBIL scores is considered by several lenders to be the benchmark for granting a loan to a borrower. 

Overall functioning of credit scores helps to depict the credit and repayment history, utilization of credit, tenures of previous debts, and so on. Although the banks have their individual limit to give loans, an individual's chances of getting a loan approved is higher if credit score is 900.

A better credit quality, not only increases your chances of availing a loan, it also opens a gate for a better interest rate and tenure. But what happens, when you do not have any credit score, and you have a need for a loan? 

Aditya Kumar, Founder & CEO Qbera.com says, “Well, you’re all good to go, until you wish to apply for your first loan, and have had no instrument of credit in your name before. With no credit history, several aspects come into question when you apply for your first loan, while you eagerly await for your loan application to be approved.”

Here is what you need to know if you’re new to the world of credit, don’t have a credit history, and wish to apply for a new loan, as per Qbera CEO. 

It isn’t necessarily a catch 22 situation

Being new to the credit universe doesn’t necessarily mean you won’t get your loan application from any bank/financial institution approved. Many people have the impression that applying for a loan without a credit history will result in rejection. Well, that’s not quite so – no credit history doesn’t mean outright rejection. Yes, it definitely harms your chances based on other parameters, but doesn’t completely rule you out.

Is your employer listed?

The organisation you work for is another crucial parameter that will determine the result of your loan application. For first timers, any lending institution, even a Fintech company (if that’s the route you wish to take) will look at your employer’s reputation and market presence.

While top banks will reject your application if your employer isn’t listed in their database (even if you have a decent credit score), Fintech companies will evaluate the many risk factors associated with your employer (past performance, current status and future prospects) before approving your loan.

If you work with a startup that commenced operations just a few months ago, it won’t help your cause. Alternatively, if you’re working with a company that isn’t too big in terms of its revenue and assets, but has been stable ever since its inception, you can definitely expect to get your application approved.

How long have you worked?

A rather crucial parameter that can supersede the employer quotient, is the number of years of work experience.

Say you just graduated from college and joined a reputed company five months back. If you apply for a loan at that point in time, your application might face rejection, considering your lack of stable experience.

On the other hand, even if your employer isn’t reputed, isn’t a listed company, but you sport 3 years of experience, your application will be approved even in the absence of a credit history.

A minimum Income Criteria

If you are to apply for a loan without a credit history, your income criteria plays a big role. First up, your income has to be at a decent level – at least Rs. 20,000 p.m. Some banks might require you to have a higher income level; but noting the massive evolution of the personal loan landscape in India, you can expect to get an online, quick, digital and smart loan from one of many Fintech companies in India.

For all that we say about getting a loan these days, it has never been easier to get a loan than it is in the current day.

Apply for a loan with the bank that holds your salary account

If you wish to go with a recognised lender that operates rather traditionally (physical verification of documents), that’s good too. If this is the route, it is best to apply with the bank that holds your salary account. So if you have a salary account with HDFC bank, going with HDFC for your loan is the best idea. The reason this route can work out best is because your approval chances will improve.

Deciding the loan amount

With no credit history, it is advisable that you don’t apply for a large loan. Considering the bank’s inability to assess your credit behaviour in the absence of a credit profile, applying for a large loan that’s more than 6x times your monthly income wouldn’t benefit your cause.

Banks will, however, let you know your approved loan amount after verifying your documents. Being safe is to apply for a loan equivalent to about 4x times your monthly income.

Get a credit card already!

The best way to kick-off your credit history is to apply for a credit card. You will definitely get a credit card without a credit history – it is easier to get a credit card than a personal loan if you don’t have a credit score yet.

Getting a credit card, using it judiciously and making timely payments will boost your credit profile and substantially improve your approval chances for a personal loan.

Knowing these essential aspects related to loan applications and their relationship with credit scores, you can get better clarity on where you stand with your application.