Understanding Your Credit Score & Its Impact on Loan Interest Rates
- Ashish Kumar Mittal
- Mar 7
- 2 min read
Why Your Credit Score Matters
Your credit score (CIBIL, Experian, or Equifax) is a crucial factor in determining your loan eligibility and the interest rate you’ll be offered. A high credit score can help you secure lower interest rates and better loan terms, while a low score can lead to higher borrowing costs or even loan rejection.
How Credit Score Affects Your Loan Interest Rate
Lenders assess your credit score to determine how risky it is to lend you money. Here’s how different credit score ranges impact loan interest rates:
750+ (Excellent Score) → Best interest rates, quick approvals.
650-749 (Good Score) → Loan approval possible, but with slightly higher interest rates.
550-649 (Average Score) → Higher interest rates and stricter approval conditions.
Below 550 (Poor Score) → Loan rejection or extremely high interest rates.
What Impacts Your Credit Score?
Your credit score is influenced by several financial habits and behaviors:
Timely Repayments – Paying EMIs and credit card bills on time helps maintain a high score.
Credit Utilization Ratio – Keeping your credit usage below 30% of the total limit improves your score.
Loan Repayment History – A history of paying off loans responsibly enhances your creditworthiness.
Number of Credit Inquiries – Applying for multiple loans in a short period can negatively impact your score.
Real-Life Example: How Credit Score Affects Loan Costs
Let’s consider two individuals applying for a ₹50 lakh home loan:
Person A (CIBIL Score: 780) gets an interest rate of 8.5%, resulting in an EMI of ₹43,000
Person B (CIBIL Score: 620) gets an interest rate of 10.5%, leading to an EMI of ₹49,500
📉 Over a 20-year loan tenure, Person B ends up paying ₹15+ lakh extra just because of a lower credit score!
Final Thoughts
Your credit score plays a major role in your financial health, especially when it comes to loans. By managing your credit wisely, paying bills on time, and keeping your credit utilization low, you can improve your score and secure better loan deals.
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