A Guide To Building A Good CIBIL Score For The Self-Employed

How many of us can plead guilty to never having taken a loan in our lives. Not anyone, I am sure. Whether a no-interest loan from a friend or a personal loan or home loan from a bank or NBFC, there is usually some occasion or the other when one needs to borrow money to finance a necessary expenditure. Your eligibility to avail a loan from a professional lending institution and your ability to bargain for softer borrowing terms is often linked to your credit score. A credit score is a mark of your credit-worthiness. In India the term Credit Score is often used interchangeably with CIBIL score.

It is thus important to build a good credit score in order to readily avail a loan during an emergency. For the self-employed, building a good CIBIL score is all the more important. This is so because while salaried employees can take salary advances or soft loans from their workplace during a financial crunch, the self-employed do not have the same luxury. In addition, in today’s world, local businesses are often affected by global events. These in turn affect sales, returns and business cash-flows, which may make it necessary for the entrepreneur to take a loan from a bank or NBFC. This will help him or her tide through a cash-flow crunch, pay salaries on time, and carry out other necessary production and business functions. Most banks and NBFCs consider a good CIBIL score range to be a score of 700 to 749. A score of 750 and above is considered excellent. This blog is a guide to building a good CIBIL score if you are self-employed.

Must read: Credit Report Terminologies

Establish A Credit History:

It may sound strange, but if you have never taken credit from an institutional lender in your life, there is unlikely to be a Credit or CIBIL score against your identity. That is because a credit score is calculated by credit rating institutions by gathering information from banks and lenders regarding your level of debt and your repayment history. Therefore, it is important to take a loan or regularly use a credit card to build a credit history and establish yourself as a honourable debtor.

Keep Your Credit Utilisation Ratio Below 30%:

A Credit Utilisation Ratio is the ratio of debt taken to that of that of credit available. Thus if your credit card has a limit of INR 100,000/- it is advisable to keep your monthly spends on the card within INR 30,000/-.

Limit The Number Of Credit Applications:

Do not take or apply for too many credit cards or loans in your name. Multiple enquiries for credit result in multiple hard-checks of your credit-score by the lending institutions to which you have put in your application/s for credit. This may result in lowering your score.

Establish A Good Relationship With Lenders:

Identify lenders who have experience or a special mandate to deal with self-employed individuals. Establish a relationship with them by utilising products that are of use to you. This may be opening a bank account, taking a credit card, or taking a short-term loan. In addition, ensure that you pay EMIs and existing loans as per agreed schedules.

Track Your CIBIL Score Regularly:

Track your Credit score across the four credit rating institutions licensed to operate in India, regularly. This is vital as these bureaus deal with tonnes of data and there is always a chance of an erroneous posting into your account affecting your score. Should you find any discrepancy, write to the bureau concerned, seeking a rectification.

Must Read: Credit Bureaus in India

Separate Personal and Business Financials:

Sometimes as self-employed individuals, we often mix our business and personal finances. It is a good practice to keep the two clear of each other. Register your business. Open separate bank accounts. Get a business credit card. Keep expense and credit lines clearly delineated. In this way, your personal and business credit scores will not affect each other.

Maintain Clear Financial Records:

Keeping good financial records is a necessity for any successful business. While this may not affect your credit score directly, in the event that you should need a business loan, lenders will need access to your financial records to evaluate your eligibility to secure a loan and your ability to repay. Thus, it is vital to keep income expenditure accounts, profit and loss accounts, balance sheets and file IT returns both for yourself as an individual and for your business separately, if it is registered. While No-Doc Business Loans require minimal documentation, they also demand a higher rate of interest than traditional business loans.

To conclude, maintaining a good credit is essential if one is to avail an institutional loan. While there are loan products such as gold loans which may not require a credit score, a good CIBIL score will help you bargain for better interest rates, even on these products. Keep in mind that 700 to 750 is considered a good CIBIL score range. If you are self-employed and in need of a business loan, do look up to the business loan products offered by IIFL available on our website https://www.iifl.com/business-loans to see if our offer matches your requirements.