CIBIL is an organization that tracks, records and reports the credit history and all the credit details of any individual who has borrowed in the past. It’s a credit information bureau whose members include banks, NBFCs, financial institutions, housing finance companies and companies that issue credit cards.
This credit history and details are collected, collated and represented in the form of a score called the CIBIL TransUnion credit score, and this score determines a person’s credit-worthiness.
All these member institutions and companies collectively share all the information of all the individuals that have borrowed from (or through) them and maintain an enormous database of borrowers, complete with credit scores.
Why does CIBIL affect your loan application?
Lenders decide interest rates, tenures, loan amounts, etc. based on a host of factors relating to your income and stability. But this happens only after they deem that you are not a risky candidate who will default on payments and/or abscond with the credit. In order to do this, they look to credit information bureaus like CIBIL, Equifax and Experian.
CIBIL gets its information from its members. CIBIL is a massive database of borrower information that lenders share with each other to protect themselves from potentially lending to defaulters.
Ratings like those offered by CIBIL are a massive indication of creditworthiness that’s based on a person’s performance with credit in the past. As such, it is a good parameter by which to judge a person’s potential future performance with loans, credit cards, etc. CIBIL and other bureaus exist to protect lenders.
How does CIBIL affect your loan application?
As we’ve established, CIBIL scores indicate your creditworthiness, capacity and ability to repay your loan.
To be eligible for a loan, your score must be at least 750. The closer it is to 900, the easier it will be for you to get a loan approved at a better rate of interest and on better terms.
CIBIL score 0 means that information about the borrower’s credit history is available only up to a period of less than 6 months in total. Also known as “NA” or “not applicable”.
CIBIL score -1 means that no information about the borrower’s credit history whatsoever. There is no information to report, hence this score is also known as “NH” or “no history”.
What factors affect your CIBIL credit score?
There are many factors affect a person’s credit score.
- Defaulting on payments: This is the primary factor that impacts your numerical CIBIL score negatively. Repayment behaviour, whether good or bad, is reported to CIBIL and this will be recorded in the report and will reflect in your score. This information is vital for lenders who are trying to ascertain your creditworthiness. Scores above 750 are considered eligible.
- Comments in a CIBIL report: CIBIL reports contain remarks and comments by lenders. Banks sometimes offer you the option to “settle” your loan for a slightly smaller amount than all of your EMIs combined, or offer interest rate reductions, etc. to help you clear your debt. If you settle your loan in any way apart from the terms on which you took the loan, there will be a remark about it in your CIBIL report and this will work against you. If there is any mention of loans being “written off” or “settled”, or amounts being paid after the due date (“DPD” = Days Past Due), banks take these as warning signs and will reject your loan.
- Defaulter list matching: Banks and financial institutions maintain lists that contain the name, age, address, current employment, and other details of individuals who have defaulted on their payments. If the details you have submitted are (even mistakenly) matched with any of the defaulter’s details, you will be denied a loan before the bank even checks your CIBIL rating. There have been instances where those who have moved into houses previously occupied by defaulters and submitted that address have been matched with the “address” records of defaulters, suffocating their chances of securing a loan.
- Standing guarantor on a defaulted loan: A guarantor is considered to be as responsible for loan repayment (even if not in a purely literal capacity) as the borrower. If you have stood guarantor to a loan that has been defaulted, this will affect your CIBIL score and report in a negative way.
- Over-borrowing: If you have taken out too many loans in the previous year, regardless of whether you were able to honour them or not, banks will not approve your loan as they deem such individuals as credit hungry. Even though your record is clean, you will be considered a risky candidate who can default at any time.
- If you are overleveraged: You can only assign a certain amount of your declared income to clearing debts. If you earn Rs. 50,000 per month, and have three other loans you’re clearing by paying Rs. 10,000 per month, each, you’re left with Rs. 20,000 for survival and personal expenditure. Banks will not approve another loan and will deem you overleveraged. Your DTI (debt-to-income) ratio will be unfavourable and you will not be able to allocate more of your income to clearing off your new loan.
- Inadequate tax-paying history: Banks generally prefer applications from those who have been actively filing income tax for at least two years prior to the application. It is easier to judge the creditworthiness of such individuals as there is an existing record apart from CIBIL that can nudge them in the right direction.
- Ratio of secured loans to unsecured loans: Secured loans are those taken against securities like assets or with a guarantor (home loans, automobile loans, etc.) and unsecured loans are taken without any security (personal loans, credit cards, etc.). A favourable ratio would be one which has more secured loans than unsecured ones.
- How much you owe to your lender: The credit utilization accounts to 30% of your credit score. The total of your credit card limits and the percentage of the limit that you are utilising. The credit utilization is balance outstanding on all your credit cards as a percentage of your total credit limit on all your credit cards. If you have utilized more than 30% of your credit, your profile is considered to be risky.
- Length of credit history: The amount of time you have been using credit is also an important factor that affects 15% your credit score. The longer the credit history, the better your score.
- Frequency of credit checks: When applying for credit, lenders runs inquiries on CIBIL reports. A lot of CIBIL inquiries and a lot of lenders pulling up your credit records will reduce your credit rating.
After you submit your loan application, the bank does its due diligence by verifying the documents you’ve submitted, and checking your CIBIL score. A CIBIL score above 750 is considered strong and makes you eligible, anything below that would probably result in your loan application being rejected.
Loan applications are also sometimes rejected for CIBIL scores of 0 or -1, which aren’t really your fault as they only consider the last 6 months of your borrowing history and don’t provide an accurate picture of your capability to repay your loan.
In any case, if your credit score isn’t too low or is in the 0/-1 range, you can negotiate with the bank to approve your loan. You may not get it on the best terms, but if the EMIs are affordable and you feel you can clear the loan off without a problem, take it. Clearing this loan off will help you raise your credit score, making it easier for you to get credit in the future.