From -1 To 850, Here's How Your Credit Score Affects Loan Payments

Credit Score: A CIBIL score of 750 is widely considered the ideal benchmark. If you have it, most lenders will give you their best rate

Borrowers with high credit scores are referred to as super-prime borrowers whose financials reflect high creditworthiness, timely payments, and a history of managing their debts smartly. Image: Pexels

Source : Other

We often say that your credit score impacts the interest rate on your loan. But what does this mean in absolute terms? A great score gets you the best loan offers. The rate on your loan will be the lowest a lender can offer. If your score is low, your rate goes up significantly, as does the interest during the loan tenor.

Lenders often advertise their risk grades – essentially the rates they provide to different credit scores. Borrowers who are assigned a low risk grade get the best rates. Let’s look at the math behind these risk grades, how the interest stacks up, and what you could do to move up the ladder.

New To Credit?

If you've never taken a loan or a credit card, you are an NTC – new to credit – borrower. You get assigned a -1 score on CIBIL. If your credit history is relatively short – let’s say, under six months – your score can be 0. Neither of these is a calamity since we all have to start somewhere. However, the temporary challenge the NTC borrower faces is a rate relatively higher than someone with a good credit score. In the example above, the NTC gets a rate comparable to someone with a score of 700 to 749.

Best Rates? Score 750 or More 

A CIBIL score of 750 is widely considered the ideal benchmark. If you have it, most lenders will give you their best rate. However, this varies from one lender to another. Some lenders may have their prime benchmark much higher – sometimes at 800 or 810.

Borrowers with such high scores are referred to as super-prime borrowers whose financials reflect high creditworthiness, timely payments, and a history of managing their debts smartly. It's not very difficult to get this score. Have a good mix of secured loans (such as a home loan) and unsecured loans (such as a credit card or a consumer durable loan). Timely payments on these loans will push your score into super-prime territory.

Under 750? You Have Some Work To Do

A score under 750 may be the result of several factors: lack of experience with credit, high credit utilisation, and maybe a few late payments as well. You must exercise caution if you're in this territory. If you can tighten your credit habits at this point, you’ll be above 750 in no time. But if you have more late payments and high utilisation, your score may decline further. 

Impact Of Credit Score On Your Home Loan Interest & Payments
CIBIL Score	Interest Rate	Per Lakh EMI	Per Lakh Interest
Lowest advertised rate	8.50%	Rs 862	Rs 108,278
Higher than or equal to 750	9.15%	Rs 903	Rs 118,255
700 to 749	9.35%	Rs 915	Rs 121,366
650 to 699	9.45%	Rs 922	Rs 122,928
500 to 649	9.65%	Rs 934	Rs 126,068
New to credit / No score / -1	9.35%	Rs 915	Rs 121,366
Rates and parameters as advertised by a large government bank. Rates and risk grading will vary from one lender to another. Rates liable to change as per the lender's discretion and policies. EMI and interest calculated on a loan of Rs 1 lakh for 20 years.

Under 700? Signs Of Trouble

If you've dropped into the 600s, there’s probably much more than a late payment that got you there. It’s possible you’ve defaulted on a loan or accepted a loan settlement offer from your lender. This isn’t a good position to be in, because any loans you take hereon will be at a much higher interest rate. You’re seen as a high-risk borrower who hasn't demonstrated creditworthiness in the past, and therefore your lenders will manage their risks by extracting higher interest out of you. The solution to this predicament is ensuring that your past dues are paid back in full along with any accruing interest, penalties, and processing charges. You also need to ensure that future payments continue to happen on time. Keep checking your credit score in this period once a month to track your progress.

Under 600? Borrowing Becomes Very Hard

If your score is under 600, it would be due to an adverse credit history with defaults and settlements. At this point, few lenders would want to lend to you. Banks have risk grading systems which may deny you a chance to get a home loan. However, NBFCs may have more relaxed eligibility norms though the price you'll pay is a much higher interest rate.

The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.