There is no denying the fact that credit score, also commonly known as CIBIL score, has a key impact on the interest rates one is offered at the time of borrowing money. The relationship between your credit score and interest rates is usually inverse, which means the higher your CIBIL score, the lower the rate of interest, and the lower the score, the higher the interest rate.
For instance, Ajay Mishra, a 31-year-old marketing manager boasts of a credit score of 760. He already has an offer of credit cards from two different banks which have waived off the annual fee, and his bank is offering him personal loan equivalent to his annual salary at 10.75 percent per annum, which is reasonable by the standards of personal loan.
High credit score
If you have a high credit score (usually considered to be above 700 or 720), lenders see you as a low-risk borrower. They believe you’re more likely to repay your debts on time and in full. As a result, lenders are more willing to offer you lower interest rates on loans, mortgages, and credit cards.
Low credit score
Conversely, if you have a low credit score (typically below 600 or 620), lenders may view you as a higher risk. They may be concerned that you might not repay your debts as agreed, which makes lending to you riskier. In such cases, lenders may charge higher interest rates to compensate for this increased risk.
Credit score ranges
Different lenders may have varying thresholds for what they consider a “good” or “bad” credit score, but generally, the higher your credit score within these ranges, the more favourable the interest rates you’ll receive:
| Best | Above 800 |
| Very good | 740-799 |
| Good | 670-739 |
| Average | 580-669 |
| Poor | Lower than 580 |
Impact on loans and credit cards
This relationship between credit score and interest rates applies to various types of borrowing such as mortgages, car loans, personal loans and credit cards.
In case of home loan, a higher credit score can lead to lower mortgage interest rates, which can save you a lot of money over a long time.
ALSO READ: 6 common misconceptions about credit scores you should be aware of
Better credit scores often result in lower interest rates on car loans as well as personal loans.
Besides, credit card issuers also generally offer lower interest rates to applicants with higher credit scores.
Frequently Asked Questions:
Why is it important to pay bills on time?
Payment history is a significant factor in determining your credit score. Even a single missed or late payment can negatively impact your score.
Is payment of debt enough to maintain a good CIBIL score?
Paying off debt is indispensable to maintain a good credit score. However, it is a responsible financial management that leads to a good CIBIL score.
Does a high CIBIL score offer better rental opportunities?
Landlords may also check your credit score when evaluating rental applications. A high CIBIL score can, therefore, raise your chances of securing rental housing, particularly in competitive rental markets.
Can there be mistakes in credit reports?
It is not uncommon to spot mistakes on credit reports. So, regularly checking your credit score allows you to spot any errors, such as inaccuracies in personal information or incorrect reporting of payments.
How is average age of credit accounts calculated?
Average age of credit accounts is calculated by taking the sum of the ages of all your credit accounts and dividing it by the total number of accounts.
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Published: 30 Mar 2024, 02:47 PM IST
Meet Mahtab Ahmad, known for his keen insights into the latest trends and news. Join Mahtab on his blog, where every post is a exploration of the ever-evolving now.