Rupesh was struggling to get his home loan. Reason? His credit score was extremely poor. He did not know what went wrong. He paid his credit card dues on time, paid off his personal loan taken for sister’s marriage long back, but his CIBIL was still not up to the mark.
How? We shall explain!
When was the last time you checked your credit score? Probably while applying for loan?
The credit-worthiness of the borrower is measured in terms of credit score. Credit score, as you may know by now, is a numeric code of three digits, usually in the range of 300-900. Higher the score, better are your chances of getting loan. But it builds over a period of time.
So, what is credit worthiness? One may ask, “If I am earning well, is it not enough?” But how will the lender get to know about your past financial records? Lending institution would like to check not only your ability, but also intention to pay back the loan.
With Credit Score, the lender gets a complete overview of risk involved in providing a loan. It holds a significant impact on the financial statistics of an individual. Credit bureaus that are commonly used in India are
- CIBIL – https://www.cibil.com
- Equifax – https://www.equifax.co.in
- Crif High Mark – https://www.crifhighmark.com
- Experian – https://www.experian.in
For most of the credit bureaus, the assessment pattern of assigning a credit score remains the same. Taking CIBIL as an example, let us look through the factors that comprise your credit history:
|Factors affecting CIBIL score
|All the payments done in the past come under this section. Matching the due dates of a loan with a timely outflow of EMI amount, settled loan credentials, etc.
A delay of 30-days in due payments can deduct 100 points straight away from the CIBIL score.
|One must have a mix of various types of loans, viz., secured loans (vehicle loans/home loans) and unsecured loans (personal loans, credit cards) as it more likely to impact your credit score positively.
|High Credit Utilization
|Credit utilization is the amount of your credit card balance or loan account utilization, as compared to credit limit. Higher credit utilization indicates a high risk of defaulting as you are spending a lot of monthly income on debt payments. Eventually, this may impact your credit score negatively.
|Multiple enquiries of Loan
|Soft enquiry (when you check your credit score) and Hard enquires (when Banks check your score) are two type of enquires in terms of Credit score. Higher number of hard enquiries may negatively impact your credit score.
Read More : Factors Affecting Your CIBIL Score
Importance of Good CIBIL score
It is known that a good CIBIL score will give you a breakthrough and assist you to overcome big chunk of hurdle faced during loan approval process. CIBIL Union strongly imposes upon the following points to get an overview of the significance of CIBIL score:
- CIBIL is an investigative tool used by financial institutions to gather information on the history of a customer’s debt repayments. It helps in analyzing his strengths and weaknesses in matters of finance and hence, indicates preliminary precautionary measures.
- A good CIBIL score is essential for prompt loan approval and disbursement processes as most financial institutions rely on this specific, nearly exhaustive data for loan sanctioning procedure.
- good credit score would enable the customer to receive long term loans at better rates.
Habits for High Credit Score:
High CIBIL score is important when one is planning to get a loan. A CIBIL score within a range of 750-900 is considered to be a good score and is achievable through following means:
- Timely payment of EMIs/ any credit card dues: Timely payments made on or before due dates for credit cards and loan EMIs lead to higher credit score
- Low Balance: Try not to maximize utilization of your credit cards. Credit utilization of up to 30% is advisable. Higher utilization indicates higher reliance on credit instruments and may negatively impact credit score
- Credit Requirements: If you have multiple loan/credit card applications (CIR enquiry section of CIBIL report), a lender will view your application with caution. It is indicative/highlighter of higher debt burden that you will be undertaking
- Healthy mix of credit: Have a balance of secured and unsecured loans. If you have more of unsecured loans, then try and balance by taking secured loan like car loan or home loan to balance the portfolio and have positive impact on credit score
- Monitoring Credit Score: It is a good practice to monitor your credit score. If there is any rectification required you may do so. Especially, it is all the more important if you have co-signed or have any jointly held loan account with someone. Any default from the co-applicants may impact your credit score as well.
Coming back to Rupesh’s case. He was sincere in repayments, not exceeding his limits of expenditure and was trying to balance his portfolio by taking another secured loan. What Rupesh needed to do further was to keep a check on his score for good 2-3 years before he applied for home loan. Here’s what went wrong! One of the credit cards he had applied for, had been charged with annual maintenance fees, despite of not using the card at all. Of course, he missed to pay on time. In the backdrop, it kept getting recorded as payment default by credit bureaus leading to low score, despite of all the attempts to stay financially disciplined. Hence, regular check of credit score is important.
Therefore, in matters about financial interests and personal loan approvals, keeping healthy credit habits positively affect the credit scores. Don’t barge for massive borrowings that lead to huge debts in the future.
Always borrow a debt that fits your pocket, a debt that can help you repay in a financially prudent manner and at the same time is convenient to access. Maintaining good credit habits are essential as these scores are then used for future loan allocations.