A low credit score is a common reason for the rejection of loan applications or unfavourable terms. A poor score indicates a higher level of risk for the lending bank or NBFC, making it more difficult for borrowers to secure the desired loan amounts, quick approval, or even the most competitive interest rates.
However, with regular CIBIL score checks, borrowers can identify areas for improvement and boost their creditworthiness. This can help increase their negotiating power and get faster loan approvals, which are especially useful when addressing emergencies like medical treatment or home/vehicle repair.
Understanding Credit Scores
This three-digit number is a summary of a user’s credit behaviour and helps lenders assess an applicant’s ability to repay borrowed funds. This score, usually ranging from 300 to 900, reflects credit history and past repayment behaviour.
Four platforms provide credit score checks in India, including:
- TransUnion CIBIL
- CRIF High Mark
- Experian
- Equifax
Credit Scores Impact on Loan Approval
A strong credit score increases the likelihood of quick loan approval. As the score increases, borrowers can look forward to getting more affordable loan offers. On the other hand, a low score may lead to rejection or a higher interest rate with a lower loan amount. It is important to check one’s credit score before applying for a loan or credit card. This helps in assessing one’s eligibility. If borrowers see a low score, they can take time to enhance it before applying to increase their chances for a pocket-friendly loan offer.
Consider the following example:
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Case A |
Case B |
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Shiksha performed a CIBIL score check before applying for a home loan of Rs. 50 Lakhs |
Amarjit applied for the same loan with a credit score of 620, indicating higher risk |
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Her score of 775 showed strong creditworthiness |
The lender imposed stricter scrutiny due to the higher risk |
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She was classified as a low-risk borrower |
Approval was not immediate due to additional checks |
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The loan was approved at an 8% interest rate for a tenure of 25 years |
The loan was offered at a 9.5% interest rate for the same tenure of 25 years |
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Her EMI came to Rs. 38,591, lowering her repayment burden |
This increased his EMIs to Rs. 43,685, increasing his repayment burden |
*Disclaimer: The example above and the EMI calculation are for illustration purposes only. The actual amount can vary as per the lenders policies, terms, and charges. (as on 12 Mar 25)
Five Factors That Lower CIBIL Scores : Here are the key reasons that may negatively impact a borrowers credit score.
Missed or Late Payments : Delayed or skipped EMIs and credit card bills reduce the score. Days Past Due (DPD) entries indicate defaults, and even small unpaid amounts can have a negative impact.
Too Many Credit Applications : Applying for multiple loans or credit cards within a short time increases hard enquiries, signalling credit-hungry behaviour. Rejections further reduce the score.
Errors in Credit Report : Mistakes like incorrect details, duplicate accounts, or false loan records can lower the score. Regularly checking and raising disputes helps correct them.
High Credit Utilisation Ratio (CUR) : Using over 30% of the total credit limit (on a credit card) can hurt the score. Even with timely payments, high CUR lowers creditworthiness.
Poor Credit Mix : A balanced mix of secured and unsecured loans strengthens the credit profile. Relying only on one type of credit may slightly impact the score. Apart from these reasons, not having any experience with credit is also detrimental to building a score.
