Credit score: Your credit score affects everything from EMIs to interest rates..
Credit Score: It impacts everything from EMIs to interest rates. Even with similar income and loan amounts, a weak credit profile can lead to paying millions of rupees more in interest. A new trend shows that banks are now giving more importance to financial behavior than income. Even today, most people believe that a good salary guarantees easy and affordable loans. But the reality is different. In a recent example, two individuals with the same age, salary, and loan amount were offered loans at different interest rates by the bank. The only difference was their credit score and financial behavior.
Same Salary, Yet One Paid More Interest
Rohit and Kuldeep had similar profiles. Both were 35 years old, earned ₹16 lakh annually, and applied for a ₹50 lakh home loan from the same bank in the same month. However, Rohit received an 8.5% interest rate for 25 years, while Kuldeep was offered a 9.8% interest rate for 24 years by the same bank. This meant Kuldeep had to pay more.
Both Rohit and Kuldeep were 35 years old, earned ₹16 lakh annually, and applied for a ₹50 lakh home loan. The bank gave Rohit a loan at an 8.5% interest rate for 25 years, while Kuldeep received a 9.8% interest rate for a 24-year term. As a result, Rohit's EMI was ₹40,000, while Kuldeep had to pay ₹45,000. Over the entire loan period, Kuldeep will pay approximately ₹10 lakh more in interest.
Why the Higher Interest Rate?
The biggest reason for this difference was their credit behavior. Rohit never missed an EMI payment, his previous car loan was paid off on time, and he uses his credit card sparingly and wisely. On the other hand, Kuldeep had some delayed payments on his record, and his credit card balance was often high. These small details make a big difference in the eyes of the bank. BankBazaar.com CEO Adhil Shetty explained the reason. He said that RBI data shows that retail credit has grown at a rate of more than 15% in recent years. Now, banks approve loans through algorithms, where your repayment history, credit card usage, and account age (credit history) are given more importance than your salary. Therefore, people with similar salaries can receive different loan terms.
Rohit had a good credit score. He had never missed an EMI payment, had repaid his previous car loan on time, and used his credit card responsibly. On the other hand, Kuldeep had two late payments three years ago and had a high credit card balance, which he didn't pay off on time.
Frequent job changes are also not idea
The difference in their jobs also plays a role. Rohit has been working at the same IT company for the past 9 years, while Kuldeep, a journalist, has changed jobs four times in 10 years. Essentially, your salary shows your earning potential, but your credit score shows how responsibly you manage your money. According to Vinay Singh, CPO of the loan company Olyv, people with good credit scores get lower interest rates, higher loan limits, faster approvals, and better financial products. Those with poor credit scores, however, have to pay higher interest rates or sometimes even face loan rejection, even if they have a stable income.
Today, banks and finance companies provide loans based on data. They also look at how you repay debts, how you use credit, and how well you maintain your accounts. Therefore, credit should not be considered just a convenience, but a long-term financial asset. Paying EMIs on time, avoiding excessive debt, and using your credit limit judiciously can get you better loan deals.
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