Most people think that getting a loan is a huge hassle and it can indeed be a long and strenuous process. The entire process can take ages and it could be years before your loan is finally approved. Understanding the reasons for approval or rejection can be a complicated task for those who are new to this scene. Banks today have become stringent regarding loan applications and a good CIBIL score can go a long way in obtaining that loan.
What is CIBIL?
Credit Information Bureau (India) Limited or CIBIL as it is commonly referred to is India’s first Credit Information Company. They collect and maintain payment records of both individuals and commercial entities pertaining to loans and credit cards. These records are used to create a Credit Information Report (CIR) and Credit Score. Banks and lenders use these scores to evaluate and approve loans.
The CIBIL Score acts as a gateway for credit institutions to determine how likely an individual is to default on his/her payments. It tells an institution how likely someone is to pay back a loan based on past patterns of credit usage and loan repayment behaviour. The CIBIL Score is allotted on a scale of 300 to 900. Scores closer to 900 indicate high credit trustworthiness and are likely to get a more favourable response from the credit institutions whereas a score close to 300 would indicate very low creditworthiness and are likely to be rejected.
The CIBIL score can be considered as a benchmark based on how one has been servicing their credit.
Factors that affect the CIBIL Score
A CIBIL score could be the difference between your loan application being accepted or rejected. Here are some of the major factors that could affect your CIBIL Score.
- Repayment History – If you are an individual who has a history of timely repayments this would reflect highly on your CIBIL Score. Clearing all bills and loan repayments before the due dates would positively impact the CIBIL Score. Any missed payments or overdue payments reflect poorly on the score as they indicate that you have trouble servicing your obligations.
- Utilization of Credit Limits – Credit cards today offer high credit limits and if you are a person who uses this limit to the maximum it could reflect poorly on your CIBIL Score. A higher utilization of available credit limits indicates an increased repayment burden. Sticking to the lower side of the limit in this case could raise your score through the roof. It pays more not to use too much credit in this case.
- Debt Servicing Time Duration – The amount of time you have been using credit is an important factor when it comes to calculating the CIBIL Score. If you are an individual who has been servicing debt for a longer period of time and ensuring timely payment it would improve the score.
- Higher percentage of Credit Cards or Personal Loans – An individual with more secured loans (home loan/auto loan) is more likely to have a positive score compared to an individual with more unsecured loans. An unsecured loan is the most expensive form of credit and higher the number of unsecured loans higher are the payments from them due to high interest rates. An individual with more unsecured loans is more likely to have a lower score.
- Credit applications – Individuals today apply for multiple loans and credits cards thinking that more credit means a better lifestyle. This hunger for more credit could impact the CIBIL Score negatively though. Credit Institutions exercise caution in case of individuals who constantly apply for more credit or who have just been sanctioned a new loan. This behaviour indicates that the individual’s debt burden has increased and they are possibly less capable of honouring any additional debt.
- Being a guarantor on loans– An individual who acts as a guarantor for loans taken by friends/relatives could lose points on the CIBIL Score. A failure to pay the loan by the applicant puts onus on the guarantor which increases their liabilities. Unable to pay back the loans as a guarantor reduces the CIBIL Score considerably.
- Loan settlement– There are instances when individuals are unable to settle loans taken by them. This reflects extremely poorly on the CIBIL Score and getting a loan after this would be extremely unlikely. Banks are likely to outright reject loan requests from such individuals.
- Credit mix – A healthy mix of credit and loans shows diversity in terms of handling credit. An individual who avoids using credit and has just a single type of credit is likely to have a poor score.
- Reducing the number of credit cards – While one might think that cutting down on the number of credit cards would improve their CIBIL Score it does just the opposite. Cancelling a credit card means that the total credit limit goes down and the credit utilization increases. Suppose you had 5 credit cards with a credit limit of Rs 300,000 and utilization of Rs 50,000 and you surrendered two of them. This leaves you with a credit limit of Rs 200,000. Your credit utilization ratio changes from 16.66% to 25%. This has a negative impact on the CIBIL Score.
- Not using the credit card – A lot of people think that using credit cards leads to excessive spending and bad credit habits. A lack of credit transactions or absence of transactions makes the person’s credit file inactive in the credit bureau. This reduces the CIBIL Score of the individual.
- Not checking the credit report – It is possible for banks to misreport facts on the credit report. Not rectifying them would ensure that these errors go on record and could have a bearing on the CIBIL Score. For example, one might have had a delayed payment in the past which still shows up in current reports. Without rectification this could deeply impact the credit score.
The difference between turning your dream into reality and it remaining a dream could be your CIBIL Scores. Following these simple steps could ensure that your dream no longer stays just a dream.