India now boasts of 1,000 universities and 40,000 colleges, and its higher education system is set to undergo a significant transformation. In addition, the new National Education Policy (NEP) is expected to bring about revolutionary changes in teaching and learning, focusing on student-centered approaches. In such a scenario, student loans are one of the most viable financing options for students to pursue their collegiate dreams without financial stress.
These loans, which can be obtained from banks, NBFCs, and other financial institutions in India, can help you take a step closer to your dream career while also offering several other advantages that allow you to focus on your studies without worrying about money. However, it is important to fully understand the types of student loans available, the application process, disbursement, and repayment procedures before making any decisions about funding your education.
For most types of student loans, your (and your co-borrower’s) credit score has a significant influence on your ability to qualify for the loan and the interest rates you receive. That’s why it’s important to understand how your credit score factors into the student loan application process.
In this article, we’ll review the credit score requirements for private student loans, explain why your credit score is considered, and outline some strategies to improve your chances of approval for a student loan.
What credit score do I need for a private student loan?
Your Credit score, also known as your CIBIL score, is determined by the information in your Credit Information Report (CIR) and is used by lenders to evaluate your creditworthiness. A high score indicates that you are less likely to default on a loan, making you a less risky borrower and thus, increasing your chances of getting approved for a loan.
In contrast, a low credit score suggests that you are less likely to make timely loan repayments and are considered a higher-risk borrower. This can lower your chances of being approved for credit.
Several factors related to your financial credit history are used to calculate your score. One important factor for student loans is the credit score of any co-borrowers. Scores can range from 1 to 999, with a score of 750 or higher considered ideal for obtaining educational loans. Those with a CIBIL score below 600 may have difficulty getting loan approval.
Also Read: 7 advantages of taking a loan for higher education
What are the factors affecting my credit score?
There are a range of factors that can affect your credit score.
- Co borrower’s repayment history – The credit score primarily reflects the promptness with which your co-borrower has repaid their debt. Any defaults in credit card or loan payments will negatively impact the CIBIL score.
- Credit utilization – Exceeding the credit limit also has a negative impact on the CIBIL score, as it reflects poor spending habits.
- Credit history length – In simpler terms, it refers to the total number of years the credit account has been open. A long and positive credit history will assist the lender in making a faster decision on the credit application.
- Paying only the minimum amount due – The chances of falling into a debt trap increase significantly if you only pay the minimum amount due each month. Interest will continue to accumulate on the remaining balance, and it also reflects poorly on repayment behavior.
- Types of credit – It’s important to have a balanced mix of secured and unsecured credit. Lenders view this positively as it demonstrates that you have experience managing both types of credit. Additionally, having only one type of credit can negatively impact your credit score.
How does my credit score affect my student loan?
Statistics show that, on average, 90% of loans are granted to applicants with a score above 750. Higher the score, greater the probability of getting loan approved. Student loans are no exception to this rule. Having a good credit score has its perks, which include:
- A lower interest rate
- Quicker approval with less documentation
- A higher loan amount
- A higher card limit
- A longer tenure
Thus, it is needless to say that when it comes to student loans, credit score is a crucial factor in the loan approval process.
Many students might not have taken out a loan or credit card in the past and therefore do not have any credit history. In such cases, when they apply for a student loan, the lender checks the credit history of the co-borrowers or the guardians, who are usually their parents. If the parents have a poor CIBIL score, there is a high chance that the loan will be denied.
Also Read: What you should know about qualifying for an education loan
How can I improve my credit score for a student loan?
There are several ways you can help your co borrower improve their credit score for a student loan:
1. Pay bills on time:
Making on-time payments is the most important factor in determining a credit score. Late or missed payments can significantly lower a credit score.
2. Keep credit utilization low:
This is the amount of credit being used compared to the amount of credit available. High credit utilization can lower a credit score, so it’s important to keep it low by not maxing out credit cards or loans.
3. Keep credit accounts open:
A longer credit history can help to improve a credit score, so it’s important to keep accounts open, even if they are not being used.
4. Apply for new credit carefully:
Hard inquiries, which occur when a lender checks a person’s credit as part of the loan application process, can lower a credit score. It’s important to apply for new credit only when necessary and to shop around for the best rates.
5. Dispute errors:
If you find errors in your credit report, it is important to dispute them with credit bureaus.
6. Keep a mix of credit:
A mix of different types of credit, such as credit cards and loans, can help to improve a credit score.
7. Monitor credit report:
Regularly monitoring your credit report can help you to keep an eye on any suspicious activity or errors, which may bring down the score.
It is important to note that credit score improvement takes time and consistent effort, it’s important to be patient and keep working on it.
If you have a co-borrower with a high income and a good credit history, you will be able to get the best interest rate on the borrowed amount. Varthana student loan is the most cost-effective way to pursue higher education without jeopardising your bank balance. Varthana student loan is obtained jointly with parents or guardians. Your co-borrower must submit proof of income as well as other documentation in this scenario. If the course you want to take and the institute you want to attend are both on Varthana’s database, you may easily apply for a student loan based on your qualifications. Apply now for a student loan here.
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