Banks look into several criteria before approving a loan application. One of those criteria is your CIBIL score. But how do lenders know your CIBIL score? Why your CIBIL score is so important for loan applications and approvals.
Read along to get a deeper insight into the CIBIL score and its importance for potential borrowers.
CIBIL stands for Credit Information Bureau (India) Limited. CIBIL scores are generated by TransUnion CIBIL, a credit information agency which works under the Reserve Bank of India and calculates an individual’s credit rating.
It analyses an individual’s creditworthiness and assigns them a numeric value or score from 300 to 900. This score enables banks and other financial institutions to analyse borrowers’ creditworthiness before granting them loans.
The Credit Information Bureau (India) Limited assesses an individual’s creditworthiness. To do so, CIBIL will analyse a person’s credit history, debt and other related information and prepare a credit report.
CIBIL assigns a score to the loan applicant based on their credit profile, which ranges from 300 – 900. Any CIBIL score of 750 or above is considered excellent while any score below 600 is deemed to be poor. Your score could be poor because of multiple reasons, including but not limited to loan defaults, missed EMI payments, incorrect CIBIL report, and missed credit card bill payments, among others.
But whatever may be the reason, banks would consider your credit or CIBIL score while approving loan or credit card applications.
The Credit Information Bureau (India) Limited calculates the CIBIL scores of borrowers using these factors:
Credit utilisation rate or ratio refers to the percentage of your exhausted or used-up credit balance against your total credit limit. Experts suggest that you maintain a credit utilisation ratio of 30% of your credit limit or below.
Excessive credit usage reflects that a borrower depends on his credit card for trivial reasons. This brings down his CIBIL score and can negatively impact his credit report.
An individual’s credit history also records his/her punctuality in loan repayments. Consecutive delays in the repayment of loans can negatively affect one’s CIBIL score.
In addition, a poor repayment history highlights financial indiscipline in a borrower’s loan management. Thus, banks and financial institutions might consider these individuals as risky investments.
CIBIL rating agencies also consider the types of loans a borrower usually opts for. For example, an individual’s credit rating might drop if he/she applies for only personal loans and other unsecured credit. On the other hand, an ideal mix of secured and unsecured loans will elevate your credit scores.
When you apply for a loan, credit agencies run hard inquiries on your credit reports to determine your creditworthiness. Too many hard inquiries can bring down your CIBIL score, as lenders will consider you a high-risk borrower. This is quite different from soft credit inquiries, which involve a simple background check.
The pointers below emphasise the importance of the CIBIL report.
The range of CIBIL scores is provided in the table below:
|CIBIL Score||Creditworthiness||Approval Probability|
|<600||Urgent Action Needed||Low|
|600-649||Murky and doubtful||Difficult|
|650-699||Satisfactory or fair||Possible|
Here is a step-by-step procedure to get your CIBIL score.
Ans. Pay your EMIs and bills on time. That’s probably the most important way to improve your score.Also, check your CIBIL report from time to time. If there are any inaccuracies, write to the bureau to get them corrected.
Ans. Getting access to credit becomes difficult if you have a below average credit score. Lenders may reject your loan or credit card application if you don’t have a good credit score.
Ans. If your credit score is zero that means you are yet to take a loan or any line of credit. While not getting overburdened with debt isn’t good, not being in debt isn’t a good idea as well. If you don’t have a credit history or CIBIL score, lenders would reject your loan or credit card application. This might create problems in case you want to get quick access to credit due to any financial emergencies.
Ans. CIBIL collects monthly reports from Banks, Non-Banking Finance Companies (NBFCs), Financial Institutions, and other organizations involved in the dissemination of credit in India. These monthly reports are called Credit Information Reports (CIRs), which cover an individual’s track record on repayment of all kinds of loan obligations such as credit card debt, personal secured and unsecured loans. These reports are not restricted to individuals but also cover the track record of business borrowers. So, next time you miss that credit card due date or EMI repayment date, your lender, will send your report card to CIBIL. They are watching you!
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