Credit score – what it is and why it is important

The credit score is a measure of your suitability for getting credit. Credit score calculation involves factors like:
  • Your debt amount
  • Number of your credit accounts
  • Your repayment history
  • Duration of your credit
Your credit score is vital for loan approvals and getting credit cards. Finance institutions can reject your credit application if you have a low credit score. A higher credit score means you can be trusted to repay your debts on time and fetches lower interest rates.

How does applying for a loan impact your credit score?

When you apply for a loan, the lender will make an inquiry into your credit history to decide whether to approve the loan. The credit bureaus will register this query, known as a “hard enquiry”. It triggers a minute drop in your credit score, usually temporary.

Your credit score is partly dependant on your credit requests. If you make frequent loan applications, you will appear as credit hungry. It looks like you are financially not secure and might fail to repay your debts. Consequently, your credit score gets significantly affected.

However, in case of loan types like auto loans and student loan, the credit bureaus may consider all inquiries within a definite period to derive from a single request.

What happens when you cancel your loan application?

If you cancel your loan application soon after you place the request, and before the hard enquiry is made, it will not affect your credit score. After the lender sanctions your loan, your credit history has already been affected by their investigation. Cancelling the loan at this point will have no further impact on your credit score.

However, if you want to cancel loan application after the sanctioned amount has been disbursed, you might have to pay foreclosure charges, processing fees, service taxes and interest for the period between sanction and cancellation.

Impact of foreclosure of your loan on your credit score

Lenders view foreclosure of loans, especially the unsecured ones, as positive credit behaviour. It helps increase your credit score. Foreclosure displays your ability to repay loans and makes you appear as a reliable, creditworthy individual.

Impact of cancelling loan application and foreclosure on future credit

  • If you cancel loan application, it will not affect future credit
  • Multiple loan applications will negatively affect the likelihood of future credit approvals
  • Foreclosure of loans will stop EMIs from that loan, opening up your income for repaying further credits. Thus, pre-closure is beneficial for availing future credits.

Learn more about your home loan eligibility here.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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