7 Ways How Gold Loan Affects Your Credit Score

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7 Ways How Gold Loan Affects Your Credit Score
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If you have borrowed or are willing to avail of
any loans, you must already know the
applicability of credit score, especially for
unsecured loans. Most lenders view the CIBIL
score as an essential aspect as it reflects an
individuals credit behavior depending on several
factors. Among these factors are ones practices
related to gold loans. If you are willing to
improve your credit score, know how a gold loan
can impact this figure. In case you are wondering
why you should maintain a high CIBIL score, you
need to know its importance first.
How Important Is Your CIBIL Score? The CIBIL
score is a numerical indication of your complete
repayment history and credit behavior to date.
For most lenders, this 3-digit number acts as a
first impression of an applicant. Although it can
range from 300 to 900, a credit score above 750
is considered decent by most financial
institutions. A higher CIBIL score contributes to
greater eligibility and helps individuals to
avail advantages, such as lower interest rates.
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Conversely, a credit score below 500 indicates
low credibility, which can make it difficult for
individuals to avail unsecured and even some
secured loans. Does Gold Loan Impact Credit
Score? Gold loans can make or break your credit
score in the following 7 ways Frequency of gold
loan application Past loan applications Credit
mix Existing gold loan debts Gold loan
default Loan settlement Auctioning off gold
items Lets dive into the details.
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Frequency of gold loan application Applying for
a gold loan or any other type of credit, in
general, leads to the lender conducting a hard
inquiry. This involves financial institutions
extracting an applicants credit report from
credit bureaus to assess his/her
creditworthiness. Multiple loan applications
within a short span will lead to numerous credit
inquiries at the same time. This, in turn, is
reflected in the credit report and can make you
appear desperate for credit. As a result, it can
eventually bring down your CIBIL score.
Past loan applications Your credit score is
based on your financial records, concerning your
past borrowings, credit behavior, and repayment
history, among others. In this case, individuals
applying for a loan for the first time may not
have significant financial information to help
determine the degree of risk they pose for
lenders. As a result, no credit history naturally
leads to a low CIBIL score.
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Credit mix As already mentioned, having a
history of zero borrowings can result in a lower
score. Conversely, having a combination of
unsecured and secured loans in your borrowing
history can help augment your credit score.
Individuals can opt for secured funding like a
gold loan during times of emergencies. This can
be a convenient option for both the borrower and
lender, given its flexible terms and collateral
security. Under other circumstances, individuals
can opt for unsecured financial products to
maintain a healthy credit mix. Here is an example
to illustrate the ideal situation to combine
different modes of credit. For instance, you
already have an ongoing business loan, and you
come across a minor cash crunch during this
period. Here, a wise solution would be opting for
a gold loan at convenient terms instead of
seeking another unsecured loan.
Existing gold loan debts
Borrowers already dealing with an unfinished gold
loan are likely to have a lower credit score.
This is because around 30 of your CIBIL score
depends on your outstanding debt during the score
evaluation.
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A substantial amount of outstanding debt can
negatively impact your CIBIL score and impact
your eligibility for an additional loan.
Gold loan default Defaulting on a gold loan will
have a negative impact on your credit report. As
a result, your CIBIL score will go down.
Therefore, it is advisable to clear all dues, if
any, to pull up your credit score. Loan
settlement Along the lines of the previous
point, when clearing your outstanding loans,
gold-backed or otherwise, make sure to receive a
formal closure certificate from the lending
institution. Confirm that your loan has a status
of closed and not settled. The former
indicates full repayment of dues along with other
charges if any. However, a settled status
indicates that you paid a payoff amount lower
than the original amount instead. This is an
indication of your inability to repay and the
subsequent loss suffered by the lender. This will
have a negative impact on your credit score.
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Auctioning off gold items While late payments
can have a negative effect on your CIBIL score,
secured loan providers hold the power to auction
off collaterals in case of a default. The same is
applicable for gold items. In such a scenario,
you not only risk losing your valuables, but your
credit score will also take a hit. Therefore, it
is advisable for borrowers to avoid defaults or
settlements as much as possible. Now that you are
aware of the different gold loan factors
affecting your credit report, it is time to
understand the ways in which you can improve your
CIBIL score.
How Can I Make My CIBIL Score Strong? Individuals
can adopt the following practices to enhance
their credit score significantly Prioritize
timely repayment Opt for longer repayment
tenures Clear existing dues
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Maintain a decent debt-to-income ratio Maintain a
healthy credit utilization ratio Avoid extending
your credit card limit frequently Check and
update your credit report periodically Keep
reading to know more about each of these ways.
Prioritize timely repayment Missing out on even
one installment can have a negative effect on
your credit score. Therefore, individuals must
ensure making necessary payments within the due
date, even if it means compromising a little on
luxury expenses or cutting them off altogether
for the entire loan tenure.
Opt for longer repayment tenures Individuals
struggling with hefty monthly repayments can opt
for a long loan duration to relieve the burden.
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 A longer tenure will bring down the EMI amount,
making it easier for borrowers to repay on time
and prevent defaults. Consequently, these timely
repayments will help pull up their CIBIL score
significantly.
Clear existing dues As you must already know by
now, outstanding dues impact your CIBIL score
negatively.  Therefore, if you have any dues, an
instant solution to improving your credit score
is to repay these amounts, along with late
penalties, if applicable.
Maintain a decent debt-to-income ratio Your
debt-to-income (DTI) ratio is the percentage of
your gross monthly income that goes into repaying
existing debts. While this does not directly
impact your credit score, a DTI ratio higher than
43 is an indication of financial stress. Most
financial institutions prefer candidates with a
DTI ratio lower than 36. This is to ensure
borrowers have adequate finances to repay debts
in time. As a result, maintaining a lower DTI
ratio will help you to have a good credit report.
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Maintain a healthy credit utilization
ratio Besides the DTI ratio, individuals must
also focus on maintaining a low credit
utilization ratio. This is the percentage of
credit used from the total available limit on all
your credit cards. For instance, you have 2 cards
with limits of Rs.1 lakh and Rs.50,000,
respectively. Therefore, your total available
credit limit is Rs.1.5 lakh. Now, if you use a
total of Rs.30,000 from all cards, your credit
utilization ratio will be Rs.30,000 divided by
Rs.1.5 lakh, leading to 20. Most lending
institutions prefer this limit to be less than
40, which indicates healthy financial behavior.
Therefore, individuals can curb excessive credit
usage and pay credit card bills timely to lower
this ratio and improve their CIBIL score.
Avoid extending your credit card limit frequently
Increasing your credit card limit too often can
make lenders view you as someone highly dependent
on credit to manage their finances. This is
because lending institutions evaluate an
applicants net worth by subtracting liabilities
from assets before sanctioning funds, and a high
credit limit makes for a huge liability.
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Therefore, just like applying for too many loans,
extending your credit card limit too frequently
can bring down your CIBIL score.
Check and update your credit report
periodically Your credit report might have
errors of sorts, such as a record of loan default
even after complete repayment or errors in your
names spelling. This is why it is highly
important that you perform periodical CIBIL score
checks to update all necessary information and
make sure it is error-free. Performing a credit
score check is especially important just before
you apply for a financial product to ensure you
meet the eligibility standards. Besides adopting
the following practices, you can also avail a
gold loan in times of financial crisis to improve
your credit score. Heres how!
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Get Gold Loan with a Poor CIBIL Score Availing
of financial products like a personal loan or a
small business loan without a good CIBIL score
can be extremely difficult. Plus, even if you
manage to acquire one, the lending institution
will charge high-interest rates to compensate for
the lack of creditworthiness. Basant India
Ltd aims to make affordable funding solutions
easily available with the above set of
beneficial features. Such customer-friendly terms
can help borrowers repay a gold loan on time
without overburdening their finances. As a
result, gold-backed funds can help individuals
build their CIBIL score significantly over time.
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