Why It Is Important To Have A Good CIBIL Score?

A person may need different types of loan from time to time to meet certain expenses. A home loan, for instance, is critical for buying or building a residential property while a car or bike loan helps one purchase the four-wheeler or two-wheeler they desire. Similarly, a personal loan can help fund emergency needs such as an unexpected medical expense or planned expenses on wedding, education or vacation. And a business loan can support business enterprises sustain or grow their operations.

While some of these loans require the borrowers to put up an asset as security, other loans can be availed without a collateral. Lenders such as non-banking financial institutions and banks often check a borrower’s creditworthiness by assessing their credit score before sanctioning any loan, especially a collateral-free loan or a credit card.

The credit score or CIBIL score is a numerical summary of a person’s credit history and repayment behaviour. Hence, it becomes important for the borrower to have a good CIBIL score in order to apply for a loan or a credit card.

What Is A CIBIL Score?

The CIBIL score is a credit score provided by TransUnion CIBIL, one of four main credit information bureaus operating in India. Credit information bureaus maintain and record the credit history and credit details of all individuals who have borrowed in the past. They also prepare a comprehensive report stating all the past instances when the borrowers made timely repayments or delayed or missed paying an EMI, credit cards payments or settled a loan.

These bureaus get information from lenders on all borrowers and maintain an enormous database, complete with credit scores, to protect themselves from potentially lending to defaulters.

These bureaus provide a credit report to banks and NBFCs containing remarks by the lenders of the credit repayment behaviour of the borrower. The report also includes the credit score, or CIBIL score, which is a three-digit number that reflects the borrower’s credibility. The score ranges from 300 to 900.

What Is A Good CIBIL Score?

The higher the CIBIL score, the better it is. So, a score of 900 denotes the maximum credibility. A good score makes it easy to get a loan, at lower interest rates and with higher amounts.

A score above 750 is considered a good CIBIL score by the lenders to offer a loan. On the other hand, a lender would typically avoid borrowers having a score less than 550. One can still avail a personal loan below the 700-mark but it may mean a lower amount and a higher rate of interest to compensate for the borrower's riskier profile.

The CIBIL score is a dynamic rating and keeps improving or deteriorating with monthly credit repayment behaviour of the borrower. Those with lower credit scores must work on their repayment pattern to avail loans.

What Factors Affect The CIBIL score?

Since the CIBIL score reflects an individual’s loan repayment behaviour, one should make timely payments of the outstanding amount on the credit card and loan EMIs to have a positive effect on the score. Non-payment and late payment of credit card bills and loan EMIs, consistently using over 75% credit limit on credit cards and too many credit cards have a negative impact on the CIBIL score.

Adverse comments by lenders on the CIBIL report, name or address matching with defaulters, status as a guarantor on a defaulted loan, excess borrowing, over-leveraging, inadequate tax paying history, higher ratio of non-secured to secured loans, and length of credit history are some other factors that affect a person's CIBIL score adversely.

Multiple hard enquiries for loans or credit cards can also affect the CIBIL score negatively. So, it is important not to apply for one loan with multiple lenders, as CIBIL enquiries made by all the lenders within a short period of time will pull down the credit score.

What To Do In Case Of A Low CIBIL Score?

• Do not borrow more than what you can pay
• Use the borrowed amount wisely
• Avoid late or missed payments
• Make timely payments of loan principal amount
• Make sure to pay the unpaid amount and close the account. Do not go for a settlement
• Do not exceed 30% of the credit card limit, thus maintaining a low credit utilisation ratio
• Review the credit report for any incorrect information and get it fixed

Conclusion

The CIBIL score reflects a borrower’s creditworthiness; hence, it is one of the most important parameters that lenders check before sanctioning a loan. A higher CIBIL score increases the scope of lenders increasing the loan amount and offering an affordable interest rate. An individual should try to maintain a good CIBIL score of 750 or above.

It is also important for an individual to opt for lenders that offer competitive rates and flexible repayment terms. A borrower should approach a reputed bank or a non-bank lender such as IIFL Finance for a personal loan, gold loan or business loan. IIFL Finance offers greater flexibility, faster approvals and easier repayment terms than most other lenders. Moreover, IIFL Finance provides the most competitive interest rates to borrowers with strong credit scores.