What is a Credit Score?
A credit score is a three-digit number (300-900 in India) that represents your creditworthiness and financial reliability. It's calculated based on your credit history, payment habits, and debt management. Banks use this score to decide whether to lend to you and at what interest rate.
Credit Score Range and Meaning
| Score Range | Category | Loan Approval |
|---|---|---|
| 300-550 | Poor | Likely Rejected |
| 550-650 | Fair | Possible with conditions |
| 650-750 | Good | Likely Approved |
| 750-900 | Excellent | Easy Approval |
How Credit Score Affects Loan Eligibility
Score 600-650 (Fair):
- Approval chances: 40-50%
- Higher scrutiny of documents and income
- May require co-applicant
- May require higher down payment
- Interest rate: 9-10%+
Score 650-750 (Good):
- Approval chances: 70-80%
- Standard approval process
- Reasonable terms and conditions
- Interest rate: 8-8.5%
- Can negotiate for better terms
Score 750+ (Excellent):
- Approval chances: 90%+
- Fast approval (3-5 days)
- Best interest rates available
- Interest rate: 7-7.5%
- Higher loan amount possible
- Flexible tenure options
Credit Score Impact on Interest Rates
| Credit Score | Typical Rate | EMI on ₹50L | Total Interest (20yr) |
|---|---|---|---|
| 600-650 | 9.5% | ₹43,500 | ₹54.4L |
| 700-750 | 8.5% | ₹41,740 | ₹50.1L |
| 800+ | 7% | ₹38,480 | ₹42.4L |
Savings Potential: 150-point score improvement can save ₹2.5-12 lakhs in interest!
Factors That Affect Your Credit Score
Payment History (35%):
- On-time bill payments increase score
- Late payments significantly reduce score
- EMI/credit card defaults hurt the most
- Recent payments weighted more heavily
Credit Utilization (30%):
- How much of available credit you use
- Ideal: Use 30% or less of credit limit
- Example: If limit is ₹1 lakh, keep balance below ₹30,000
- High utilization signals financial stress
Credit Mix (15%):
- Variety of credit types (secured + unsecured)
- Car loan + home loan + credit card = good mix
- Shows ability to manage different credit types
Credit History Length (10%):
- Longer credit history = higher score potential
- Keep old credit cards open (even if not using)
- Establishes track record of responsible borrowing
Hard Inquiries/New Credit (10%):
- Multiple loan/credit applications hurt score
- Each application = hard inquiry = score dip
- Keep applications to essential ones only
- Score recovers after 3-6 months of no applications
How to Improve Your Credit Score
Quick Wins (3-6 months):
- ✓ Pay all bills on time
- ✓ Reduce credit card balances below 30% utilization
- ✓ Pay off any outstanding EMI defaults
- ✓ Dispute any errors on credit report
Medium Term (6-12 months):
- ✓ Clear old outstanding dues/write-offs
- ✓ Request credit limit increase (no hard inquiry)
- ✓ Maintain on-time payment history consistently
- ✓ Keep credit utilization at 10-20%
Long Term (12+ months):
- ✓ Build diverse credit mix
- ✓ Maintain old credit accounts (don't close)
- ✓ Pay down total outstanding debt
- ✓ Avoid taking unnecessary new credit
Common Credit Score Mistakes
- ✗ Late or missed EMI payments (biggest damage: -50-100 points)
- ✗ High credit card balances (damage: -20-50 points)
- ✗ Multiple loan applications in short time (damage: -10-30 points)
- ✗ Not paying credit card minimum (damage: -50-100 points)
- ✗ Closing old credit accounts (damages long history)
- ✗ Defaulting on loans (damage: -100-200 points)
Credit Score for Different Loans
| Loan Type | Minimum Score | Ideal Score |
|---|---|---|
| Home Loan | 600 | 750+ |
| Car Loan | 650 | 750+ |
| Personal Loan | 600 | 750+ |
| Credit Card | 550 | 700+ |
| Loan Against Property | 650 | 750+ |
Credit Score Timeline: Improvement
- Week 1: Late payment report filed (score drops 20-50 points)
- Month 1: Payment made after due date (score recovers 10-20 points)
- Month 3: Consistent on-time payments (score improves 20-30 points)
- Month 6: Continued payments + low utilization (score improves 30-50 points)
- Year 1: Diverse credit + good history (score improves 50-100 points)
- Year 2+: Score stabilizes at new high level
Checking Your Credit Score
Free sources in India:
- CIBIL Score: Available free on MoneyControl, Paisabazaar, BankBazaar
- Equifax Score: Available on Experian website
- Experian Score: Direct from Experian India
- Annual Credit Report: Free annual report from CIBIL
Action Plan: Score Improvement
- Check your current credit score free
- Review credit report for errors
- Create list of late/missed payments (if any)
- Prioritize settling any outstanding dues
- Reduce credit card balances
- Set calendar reminders for bill payments
- Avoid new credit applications for 3-6 months
- Recheck score after 3-6 months of good behavior
- Apply for loan after score improves to 750+
Negotiation Power of Good Credit Score
With a score 750+, you can:
- Negotiate with banks for 0.5-1% rate reduction
- Request waiver of processing fees
- Ask for flexible prepayment terms
- Get loan approval faster
- Access to exclusive loan products
- Higher loan-to-value (LTV) ratio
Conclusion
Your credit score is one of the most important factors determining loan approval and interest rates. A 100-point improvement can save you lakhs in interest over the loan tenure. Prioritize improving your credit score before applying for any loan. Maintain good payment habits, keep credit utilization low, and build a diverse credit portfolio. Use our EMI calculator to see how different interest rates (based on credit score) impact your overall loan cost.