New Delhi: Good credit – above 750 – is always desirable as it will improve your access to a wider range of lenders and attractive interest rates. Banks also charge lower fees from borrowers with high credit ratings.
The credit score shows how a person has serviced their past, present loans and credit card fees. Creditworthiness indicates how responsible a borrower was with their credit history. Lenders believe that a person with a high credit score is less likely to default on their future credit obligations, and they consider these borrowers to be less risky. They charge lower interest rates from these borrowers. When a borrower has a low credit score, lenders charge him a higher interest rate to offset the risk they are taking. It’s worth noting here that those with a credit score less than 700 may not even get a loan from leading commercial banks.
However, despite a good credit rating, the loan application can be rejected. There have been several cases in the past where a bank has declined a borrower’s loan application despite having a credit score greater than 800. This is because banks and financial institutions are also examining the applicant’s ability to service additional loans. To assess a borrower’s ability to service additional credit, banks typically use a borrower’s debt-to-income ratio (DTI). DTI is calculated monthly. A low DTI means that a person is currently servicing less debt and having additional income to service compared to their income.
For example, if your monthly income is Rs 80,000 and you’re already paying around Rs 45,000 for your home loan, car loan, and credit card fees, your DTI is 56%. In such a case, you can refuse any further loan application. According to experts, banks consider such applications for new loans, where the DTI is less than 40%.
So experts say that if you have a higher loan compared to your income, then if you get a lump sum like an annual bonus, you should pay it off in part. This will improve your creditworthiness in the future and you will have better control over your financial situation, especially during a financial crisis that we are currently experiencing.