How does your credit score affect your personal loan application?

4 MinsNov 09, 2022

How would you react if someone, who you know has a gambling problem or is living beyond their means, approaches you for a loan? You would most likely consider such a person a bad credit risk and refuse the loan. 

How does your credit score affect your personal loan application?


This is for a person you know. Now consider the problems banks face when millions of people apply for unsecured loans such as personal loans. How will a bank judge which among the applicants is a good credit risk? They do this by accessing their credit score.

A credit score is a three-digit number arrived at by Credit Bureaus – specialised businesses licensed by the Reserve Bank of India -- after studying a person’s credit history and spending patterns. This is based on data shared by banks, non-banking financial companies, credit card companies and home loan issuers.

There are four credit bureaus operational in India – Trans-Union Credit Information Bureau of India (CIBIL), Equifax, Experian and CRIF High Mark. While their data analytics algorithms may differ, most operate on similar lines. The credit scores they issue are three-digit numbers between 300 and 900. The closer the credit score is to 900, the better, as this indicates that the person is a good credit risk.

Some of the factors that affect a person’s credit score – positively or negatively are as follows:

1. Payment history: Paying credit card bills and loan EMIs (Equated Monthly Installments) on time and in full will have a positive impact. Tardiness in this aspect will have a negative effect.

2. Credit utilisation: This is a ratio of the total credit available versus the total credit availed. For example, if your credit limit on your card is Rs. 100,000 and you have spent Rs. 70,000 on it, the credit utilisation ratio is 70%. A ratio beyond 50% will likely adversely impact a person’s credit score.

3. Age of credit: This refers to how long a person has availed of credit and repaid it. Obviously, a longer and more positive pattern of repayment is a positive.

4. Credit mix: This refers to the kinds of loans – secured and unsecured that a person has and how they are serviced. Generally speaking, people tend to be more conscious of servicing their secured loans – such as home loans -- on time, as a failure to do may result in the collateral asset being forfeited. A similar positive pattern for unsecured loans – credit cards, for example – is a big positive.

[Also ReadSteps to secure a hassle-free and instant Personal Loan]

How does your credit score affect your personal loan application?

A high credit score can help you in multiple ways when applying for a personal loan.

  • Quick approvals: As far as the banks are concerned, persons with high credit scores are prime customers they are keen to onboard. As a result, if your credit score exceeds 750, you will find that your loan application is approved quickly.
  • Competitive terms: Banks are most likely to offer competitive interest rates and processing fees to customers with a high credit score.
  • Longer loan tenures: Not just lower interest rates, but banks often offer people with high credit scores longer tenures. A combination of these two can result in substantial savings.
  • Pre-qualified offers: If you have an existing relationship with a bank and also a high credit score, the bank may advance you with a pre-qualified personal loan offer. If you choose to avail of it, the process of application to disbursal will only take minutes.

On the other hand, a lower credit score may result in higher personal loan interest rates and processing fees, a more cumbersome application process and even outright rejection of the loan application.

Axis Bank offers a range of Personal Loans tailored to meet the needs of its borrowers. You can use Axis Bank’s Personal Loan EMI calculator online.

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