Synopsis: In this article, we will explore what credit history is and why it is essential. We also discuss its crucial role in shaping decisions about loan approvals and interest rates. 

Among the hordes of financial advice often dispensed by financial institutions: save and invest money, maintain emergency funds, and pare down debt, maintaining a strong credit history stands foremost. From banks, NBFCs, mortgage lenders, and utility companies to employers, your credit history and credit scores are of pivotal interest. 

Securing loans at favorable interest rates is a feature of high creditworthiness, which is encapsulated in your credit reports and credit scores. These bureau reports are, in turn, based on your credit history. Even credit scores, three-digit numbers issued by credit information companies (CICs) such as TransUnion CIBIL, Equifax, Experian, and CRIFHigh Mark, are a numerical summary of your credit history. 

Below, we delve into the concept and significance of credit history and its impact on loan approvals and interest rates. 

What is Credit History? 

Credit history is a record of your debt repayments, including the times you might have delayed or skipped making payments. It signals your creditworthiness, which is the ability to service future debt obligations. Lenders believe that past responsible debt management conduct is reflective of future behavior.  

Your credit history is reported in credit reports issued by any of the four RBI-registered CICs (CIBIL, Equifax, Experian, and CRIF High Mark). These credit reports provide detailed outlines about the types, numbers, terms, and ages of credit accounts held, the outstanding debt balances, credit amount utilization rates, bill payment histories, and the number of hard inquiries made by various lenders recently.  

Credit reports also contain useful information about tax liens against your property, any filings for bankruptcy, or adverse court judgments. Furthermore, CICs base their credit scores on your credit history. While your credit report is based on 36 months’ worth of credit history, CIBIL scores are determined based on 24 months’ worth of credit behavior. 

However, negative credit events, such as bankruptcies or unpaid credit card debt, are removed only after 7-10 years from the credit history reported in bureau reports. 

Where do CICs get information about your credit history?  

CICs consolidate your financial history received from banks and other financial institutions in your credit report. They also compile information from auto finance companies, court records, property ownership, and more. As a result, your credit information may vary across the four agencies, affecting your credit scores.  

What is the Significance of Credit History?  

What makes credit history truly important is its use by CICs to create credit scores and credit reports. Lenders, employers, insurers, and more acquire your credit reports for their decision-making. 

  • Assess Financial Management: Since your credit history details your repayment patterns and frequencies, spotlighting any significant delays and defaults, lenders use it to assess your financial and debt management. Poor credit histories make it harder to obtain new loans. 
  • Set Prices: Insurance companies and lenders undertake risk-based pricing for their financial products and services. Low credit scores signal high risk, which may lead to loans being offered at higher interest rates and insurance with significant premium markups.  
  • Screen Tenants: Many landlords use credit history and credit scores to screen potential tenants. Renting a new apartment is difficult for those with poor payment histories.  
  • Offer Services: Telephone and utility companies can also assess the credit history given in your credit reports to assess whether it makes economic sense to offer services to you and evaluate any chances of payment defaults. 
  • Evaluate New to Credit (NTC) clients: Since the issue of a CIBIL score requires at least six months’ worth of credit information, lenders can instead look over bureau reports containing credit history, however short-lived for their credit underwriting processes. The aim is to check for any outstanding payments, the number of inquiries, and any red-flagged loan accounts to better gauge the applicant’s ability to repay loans. 

How Does Your Credit History Impact Loan Approvals? 

In addition to evaluating your financial accounts, employment information, and banking transactions, lenders utilize credit scores to assess a potential borrower’s creditworthiness, and credit scores, such as CIBIL scores, are effectively a three-digit numerical summarization of your credit history ranging between 300-900.  

Generally, credit scores are a function of four key factors: payment history, credit mix (the number and types of business loans, credit cards, mortgages, and more), credit utilization ratios, and the number of hard inquiries made. Higher credit scores (750+) reflect good credit behavior and improve the chances of obtaining loans. Check your credit score for free without any adverse impact from Protium’s app.  

When making loan sanction decisions, lenders assess your credit history to get a comprehensive view of your repayment track record and loan defaults. Lenders avoid sanctioning loans to those with outstanding payments and poor credit histories. They also prefer extending loans to those with longer credit histories as it helps establish patterns over long terms, which is especially useful when evaluating applicants applying for business loans, auto loans, and mortgages.  

Additionally, as your credit history also reflects the leverage already taken on by the borrower, lenders compute the debt burden ratio before approving loans. Borrowers with a high debt-to-income ratio represent high risk and are more likely to have their loan applications rejected.  

How Does Your Credit History Affect Interest Rates? 

Borrowers can make significant savings on their loans by exhibiting a strong credit history. As lenders rely on credit history to price their products, high credit scores entail the issue of loans at low-interest rates with favorable terms and conditions. This matters especially when taking out big-ticket business loans or equipment financing, as even a difference of 100 basis points can result in massive savings in interest payments. 

To illustrate, consider a borrower “A” with a 700 CIBIL score getting an Rs. 10 lakh business loan at 8.5% payable over 10 years and a borrower “B” with a 550 CIBIL score getting a loan at 10%. Considering all other things equal, A would end up paying out Rs. 4,87,828.27 as interest compared to Rs. 5,85,808.84 for B, which results in a close to Rs. 1 lakh difference. (Rs. 97980.57 precisely) 

Moreover, borrowers can benefit from lower processing charges and better pre-approved loan offers with a positive credit history and high credit scores. Want to improve your credit history quickly? Here are 7 ways to do it. 

Credit History: The Key to Unlocking Favorable Loan Terms and Interest Rates 

Understanding how credit bureaus compile and present your credit history is crucial to ensuring solid financial and debt management. Good credit behavior gets reflected in high credit scores, which simplifies access to affordable loans at low-interest rates. 

Do you want to apply for a business loan but are clueless about where to start? Download the Protium App and start by checking your credit score for free. Apply our smart tips to improve your CIBIL score or directly apply for our business loans available at competitive rates.