Two colleagues earning the same salary apply for a personal loan. One is approved quickly with a great rate, while the other is rejected or offered a lower amount. This is rarely due to your income and is usually due to your credit profile. Lenders use your profile to decide whether to lend to you and what rate to charge. Fortunately, your credit profile can be improved. This guide will show you what factors lenders are looking at, what you can improve, and how long to allow.

Why Do Two People With the Same Income Get Different Personal Loan Outcomes?

This is all based on your credit profile. In this example, we have two people with the same monthly income of ₹60,000, and here is how they compare:

PointApplicant AApplicant BCredit Score790660Credit Utilization20%85%Current EMIs₹8,000 (about 13% of income)₹28,000 (about 47% of income)Late PaymentsNoneTwo in the last yearOutcomeFast approval and better rateRejected, higher rate, or lower amount

These numbers are just an example. Every lender will have its own criteria. Applicant B isn’t a bad borrower, but their profile is showing some warning signs. By reducing their EMIs, they will give themselves more room.

How Can You Improve Your Credit Profile in 6 Months?

Applicant B can improve the majority of this by following a consistent plan, and this is the step-by-step process:

Step 1: In the first week, obtain your report from a credit bureau. Read through each account to check for any loans you aren’t familiar with, accounts showing as open that are actually closed, and incorrect personal details.

Step 2: In the first two weeks, dispute any mistakes with the bureau and lender, and keep your proof ready.

Step 3: In the first month, pay off any overdue amounts. Set up reminders or auto-debits to ensure you never miss a due date again. Have some cushion in your account around the time of your EMIs.

Step 4: In the first three months, pay down your cards. Try to keep your card balance below ₹60,000 if your limit is ₹2,00,000.

Step 5: In the second to fourth months, close any small loans or reduce your EMIs to reduce how much of your salary you’re spending on debt.

Step 6: From the fourth to sixth months, stop applying for any new credit. Once your report has been updated with your improvements, apply for your personal loan. Double-check your report before applying.

Why are Credit Utilization and EMIs Important?

These show how stretched your finances are, and here is how they work:

  • Credit Utilization: This is how much of your credit you are using. If it’s over 30%, it shows you’re reliant on credit.
  • EMI Percentage: This is how much of your monthly income you’re spending on repayments. Many lenders will be cautious if it’s over 40 to 50%.
  • Hard Inquiries: Every time you formally apply for credit, it will leave a mark. Having a number of these in a short period can indicate you’re looking for emergency funds.
  • Account Age: The longer your accounts have been open with a clean history, the better. Closing them can affect this.

How Long Does it Take to See Improvements?

Each improvement will take a different amount of time. Below are the times you can expect to see improvements:

  • Correcting Mistakes: You can see this within a month or so once the bureau has resolved your dispute.
  • Credit Utilization: This can be seen in your score within the next billing cycle.
  • On-Time Payments: Usually after 3 to 6 months of on-time payments, you’ll see a clear improvement.
  • Previous Defaults: This will take longer to improve. It can take a year or more.

Plan to start improving your profile 3 to 6 months before applying.

What Mistakes Should You Avoid?

There are a few common mistakes people make that can cause you to lose progress, and here is how they break down:

  • Closing Old Cards: This can reduce your credit history and increase your credit utilization.
  • Minimum Payments: This will leave you with a high balance and increasing interest.
  • Applying Everywhere: Having many applications within a short period can reduce your score.
  • Not Paying Small Amounts: Even a small overdue amount can show as a missed payment.
  • Not Checking Your Report: If no one notices your errors, they can be on your report for months.

Conclusion

Improving your profile is done by making small, consistent improvements. Check your report, correct any mistakes, pay on time, and allow yourself months to improve. When you are ready to borrow, Finnable offers digital personal loan options for eligible salaried individuals, with loan amounts of up to ₹10 lakh and repayment tenures ranging from 6 to 60 months. Eligible borrowers may also benefit from disbursal within 60 minutes, subject to verification and approval. Finnable additionally offers Loan Against Property (LAP) for those seeking secured financing.

 

Before submitting your application, review your credit report, assess your existing financial commitments and calculate an EMI that fits your monthly income. Remember, a stronger credit profile can improve your chances of loan approval and help you access more favourable borrowing terms, although the final decision rests with the lender.