Your CIBIL score or credit score is an important factor in determining whether you will be approved for a loan or not. CIBIL scores are generated based on your credit history which includes past credit taken and payment patterns in relation to them. A high score represents strong creditworthiness while a low score indicates low creditworthiness. Low scores will brand you a risky borrower and lenders will be hesitant to approve your loan application.
What is a Good Credit Score?
While there is no ‘good’ or ‘bad’ credit score, lenders are wary of extending credit to borrowers with a credit score of 700 or lower for loans like home loans. Lenders prefer a credit score of 750 and above for unsecured loans like a consumer loan.
Credit Score Estimate
What does it mean for your credit health?
Excellent credit score indicative of consistent and unblemished record of past repayments
You will likely get loans at competitive rates of interest from most banks
Secured loans (home loan, car loan) as well as unsecured loans (personal loan) will be easily available subject to credit report
Fairly good record which reflects fair loan repayment in the past
Likely to get loans at competitive rates from most banks
Depending on eligibility, you will receive secured loans (home, card loan) fairly easily
For unsecured loans (personal,, credit card), banks might conduct further analysis
Low score indicative of delays or irregularities in repayments in the past
Lenders will avoid granting a loan, unless a significant credit check has been done
You might have to pay aa higher rate of interest
Credit providers might approve loans but at low LTV and high collateral
Very low score, indicatives of over leverage or many irregularities in repayments
Very difficult to obtain a loan from established financial institutions and creditors
Credit report will reflect write offs/ delayed repayments/settlements
Why your credit score is important
Making money in this world is not hard, provided you have one key ingredient – Money. We live in times where we need money to make money, and we often spend precious moments of our lives thinking how to make this money. With banks and lending agencies opening up in every town and city, one might think that getting money will become easier, but this might not always be the case. Given the risk involved in lending, almost all financial organisations rely on certain criteria to gauge the repayment capacity of an individual. A credit score is perhaps the single biggest determinant when it comes to you availing a loan, which makes it critical for us to maintain our scores.
Not only does a good score improve our chances of getting a loan/credit, but also helps us get a better interest rate (if played smart). While we give ourselves a makeover before approaching a lending organisation, paying attention to our score and giving it a makeover is just as important.
Reason for Low CIBIL Score
There are many reasons for a low CIBIL score. A borrower’s score can reduce because of his/her own errors and due to errors made by banks. Generally, mistakes made by banks include wrong information sent about a borrower to CIBIL and failure to update records among others.
The main factor that affect the CIBIL score of a person is his/her own behaviour. The way borrowers deal with their finances can increase or decrease their scores. Mostly scores fall because of past behavior of the borrowers. Some of the common errors that borrowers make are:
- Outstanding Credit Card Balance - Some borrowers do not pay their total credit card bills every month and only pay the minimum amount due, which leaves them with an outstanding balance on their cards. What they do not realise is that this can reduce their credit score.
- Too Many Loans/Credit Cards - If a borrower applies for too many loans or credit cards, then every time a bank checks his/her credit report or score for processing the loan or credit card application it is counted as a hard enquiry. Too many hard enquiries can result in reduction of the score.
- High credit usage - If a borrower uses over 30% of his/her credit limit, then it negatively affects his/her score as it shows his/her dependency on credit is high.
- Delay in repayments - If a borrower delays in making his/her EMI payments, then it will be noted in his/her CIBIL report, which will reduce his/her credit score. Repayments are one of the important factors that is considered while calculating the credit score.
How to improve your credit score
Now that we know why the credit score is important, let us take a look into what you can do to improve your score. The need to improve the score will arise only when your credit score is in trouble and you are planning to apply for a new loan or a credit card. If we are to assume that your score is not good then these are the things that you can do to help it improve.
- Check Your Credit Report
- Don’t keep applying for credit if rejected
- Keep the frequency of applications low
- Pay your loans
- Pay your credit cards on time
- Don’t settle loans and credit cards
- Keep the borrowing to a minimum
- Get a mixed bag of credit
- Watch out for joint applicants
Checking your credit reports regularly is a good idea because it will tell you two things that are absolutely critical to your credit score. The first will be the loan or credit card where the defaults or delayed payments exists that have brought down your score. The second thing it will tell you is the information that is recorded in the credit report. This helps in fixing the credit score because if you notice that there is negative information, in the form of defaults or delays in payments, mentioned on the report you can always approach the bank and CIBIL to get the situation corrected.
If you have applied for a loan or a credit card and your application has been rejected, the information will be recorded in your credit report. If you go and apply to another bank immediately then they will see your low score and the previous rejection and may reject your application. The best thing to do in such cases is to not apply again and wait for the score to improve.
One more reason why you should avoid applying for loans and credit cards too many times is that every time you apply for credit, the bank will ask CIBIL for your credit report and the inquiry will be recorded in the report. The enquiry by a bank can also cause the score to come down after each request for your report. This means that you suffer two disadvantages, the first being that you display a credit hungry behaviour and the second that your score comes down even if you have every intention and capability of paying back the loan/card on time.
If there are loans which you have been delaying the payments of then you should make it your priority to start becoming prompt with the payment. If you are struggling with the current EMI that you have to pay then you can approach your bank to help you restructure the debt to make it easier to pay.
When it comes to credit cards, the best thing to do is to not come too close to the limit of your credit cards. You should also make sure that you are not paying back only the minimum amount due on your cards, you need to pay back the entire amount or at least a sizable amount.
Many times people opt to settle a credit card or loan. What this means is that they approach the bank and ask for a deal that will allow them to close the debt for an amount that is lower than the actual amount due. While banks do, at times, entertain such requests, the settlement does reflect on the credit report and will have a negative effect on the score or a bank's willingness to offer fresh credit.
If you are applying for too many loans or are always near the limit of your credit card then your score is likely to come down since such activities display a credit hungry behaviour. The best thing to do is not to take a loan until unless absolutely necessary and make sure you don’t come close to your credit limits on the cards.
When it comes to loans there are two types of loans, secured and unsecured. If you take too many unsecured loans, banks tend to see it as a negative and might be inclined towards declining your loans. What you can do to is to take both unsecured loans like personal loans and secured loans likes car or home loans. P.S Credit cards also counts as unsecured credit.
This is actually a situation where you could suffer even if you are not at fault. In this scenario, if you are the joint applicant for a loan someone else has taken, and they have defaulted on payments then you too will lose out in your credit score as it will reflect in your report as well. The best way to avoid this is to ensure that the loans and cards are being paid for on time.
While it is true that a bad credit score can be damaging towards your future credit requirements, the situation is not completely beyond repair. The only thing you need to keep in mind is that it takes at least a few months for the scores to improve so you need to strap in for a bit of a wait before your scores start showing any improvement.
Maintain your CIBIL Score like a Pro
Doing all things right and still facing problems with keeping your CIBIL score, wondering what you can do more? There are several factors that affect your CIBIL score, not just bad credit behaviour in terms of payments and credit limits etc. Credit choices and their related areas can also affect your score. Some reasons are listed below:
Credit Utilization - When you use the option of credit you should always keep in mind the Credit Utilization Ratio. This ratio is a comparison of the amount of credit you have used to the amount credit you have balance. This ratio amounts to 30% of your actual score. So let’s take an example of Mr. Pandey, who has 5 credit cards, with a total of 10 lakhs of credit limit on all of them, and he decided to close 3 of the 5 cards since he actively used only 2 cards. After she followed the procedure to close the 3 under-utilized cards, his credit limit fell from 10 lakhs to 2.5 lakhs. Mr. Pandey made most of his spending on credit cards and his monthly expenditure would amount to 2 lakhs on his 2 active credit cards, due to his under-utilization of the other 3 cards his credit score drops significantly.
Loan Enquiries - If you want to buy a new car or get a loan to buy your dream home, you would like to check with few banks before you make your decision. Making multiple enquiries can raise a red flag against your name and in turn affecting your score drastically. For every enquiry you make with a financial institution, you enquiry gets recorded, and affects your score making it difficult for the bank to decide to provide you with the credit. Every enquiry brings down your CIBIL score. Let’s take the example of Mr. Pandey who wants to buy a villa in the suburbs of his city, he contacts 5 different banks for a loan of 80 lakhs, to ensure he is getting the best deal. Each of these enquiries have been recorded in CIBIL. With each record of enquiry Mr. Pandey is now eligible only for 65 lakhs, despite having a good repayment history.
Repayments - Confused? How can repayments lead to a lower CIBIL score? Well, if you suddenly pay off your credit cards bills with a huge amount of money, it can affect your score. It can make your financial records look unstable and in turn could lead to a lower score. Whereas repayment on time in an effective manner will have a positive influence to your CIBIL score. Let’s again take the example of Mr. Pandey, whose uncle expired and in his will left him with 30 lakhs, since he has received such a huge sum, Mr. Pandey decides to pay off his 2 lakh credit card bill with the hopes of increasing his credit score for his good repayment before time, but when the bank receives this payment, they are suspicious of the transaction and notes the same, thereby decreasing the score rather than increasing it.
If you have missed payments on any of your loans over the years, your credit score would be negatively affected. A higher utilization pattern equals to more repayments and, therefore, negatively affect your score.Q. How do more number of personal (unsecured) loans affect your score?
More number of personal (unsecured) loans would also affect the score in a negative way since such loans have a high rate of interest compared to car or home loans and, therefore, more likely to result in defaults.Q. What if you are ‘credit hungry?’
If you are in urgent need of moolah and applied for credit from several lenders, it will have a negative impact on your score since lenders will then be wary to issue a fresh loan while evaluating your creditworthiness.Q. How can I improve my credit score?
- Timely payment of EMIs results in a clean credit history.
- Make full payments on your credit card instead of the minimum payment. If all else fails, try to make the minimum payment.
- A credit card debt is known as revolving credit which helps build a good credit score faster (provided payments are made on a regular basis) compared to a loan.
- If your utilization of credit limit has been low, it will have a positive effect on your score.
- Prompt repayments help boost your score.
- Reviewing your credit history regularly helps you gauge your financial health.
A CIBIL score is a representation of your entire borrowing history. It’s a representation of a trend, which means that if you’d defaulted on a loan in the past, merely paying off a few credit card bills on time won’t raise the score drastically. You’ll need to thoroughly involve yourself in a routine of honouring payments on time, every time, taking more secured loans as compared to unsecured loans and never missing a credit card payment. The score will improve gradually, as you keep honouring your debts.
News About CIBIL
CIBIL hopes to set up a credit score for online shoppers
With more than 380 million users on the internet in India, the country has now become the 3rd largest internet user in the world. 60% of these users are online shoppers as well. The risk profile associated with these users in still unknown, with the hope to step up, and maintain credit scores, CIBIL has decided to step in. The rating agency collects records on a person's payments of credit cards, loans of all types - cars, home, corporate, agricultural, etc. The plan to set a credit score for online shoppers will help companies like Amazon, Flipkart, eBay, and other e-commerce to gauge the credit profiles of their customers, and accordingly offer payments options for the products based on your score, this options can either be installments or in cash
25th February 2016