An individual’s credit score provides a loan provider with an indication of the ‘probability of default’ of the individual based on their credit history. What this means in simple English is that the score tells a credit institution how likely the loan applicant is to pay back a loan (should the credit institution choose to sanction your loan) based on the individual’s past pattern of credit usage and loan repayment behaviour.
Given that the credit score is a loan evaluation tool developed to help loan providers, the first logical question that comes to mind is “what difference does it make to me?”
Well, the obvious answer is that the higher your credit score (i.e. the closer it is to 900) the more likely you are to get your loan application approved. The reason being, closer the score is to 900, the more confidence the loan provider will have in the individual’s ability to repay the loan.
While, this is what is claimed it is always useful to analyse the underlying data, which serves as the foundation based upon which such claims are built.
So what exactly does the data say?
The best way to analyse the impact the credit score has on an individual’s loan application is to observe the lending behaviour demonstrated by credit institutions over time. The table below shows us a comparison of new loans sanctioned by loan providers based on an individual’s credit score in 2008 as compared with those in 2011.
The data tells us that 90% of new loans sanctioned in both 2008 and 2011 were to individuals with a credit score of 700 or more.
However, the data also indicates that over three years, lending institutions showed a change in preference from individuals with a credit score ranging from 750-799 in 2008 to individuals with a credit score of 800 and above in 2011.
Hence, you will have to maintain greater financial discipline in order to secure credit in the future.
It is important to note that loan providers also consider your total income, overall debt burden and fit with their internal credit policy before deciding upon your loan application. Hence, if your EMI to income ratio is over the set cut-off percentage your loan application may get rejected despite having a credit score of 847.
Simply put, the Cibil TransUnion Score is like the marks one earns on school examinations. Higher marks (credit score) do increase the chances of your being accepted to college (getting a loan approval) but don’t guarantee your admission. A more overall evaluation of your extracurricular activities (income level, overall debt burden) is required before you admission is secured.
Similarly, different colleges will have different cut-offs with regards to the marks (credit score) required to gain admission.
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