CIBIL score and its affect on your personal loan

There is the least chance that you have never heard about this term ‘CIBIL score’. It is one of the crucial parameters that decide one’s eligibility for a loan. You might have heard some people saying that poor CIBIL score led to the rejection of their loan. Let us talk about CIBIL score in detail.

What is CIBIL?

TransUnion CIBIL is a credit information company that maintains the credit files of the individuals and companies in India. It captures information through PAN number and other personal details of the individual/company. Through those information it generates a report that tells about the creditworthiness of an individual or a company.

What is a CIBIL score?

It is actually a credit score generated from the credit history of a person. The repayment track record of one’s previous loan decides the score.

The score tells the following details about a person,

  • How many loans one has applied for in the past
  • Whether the repayment of the loan was timely or not
  • Whether is there any loan default or not.
  • Was there any loan foreclosure in the past.

What all things adversely impact the CIBIL score?

A loan application file is immediately rejected on discovering that the CIBIL score of the loan applicant is poor.

The poor CIBIL score is often the result of the following things:

  • Cheque or ECS bounce/bounces due to the absence of sufficient balance in your account on the EMI due date.
  • Late payment of the EMI or not paying it at all.

CIBIL score range

The CIBIL score starts from 300 and ends at 900. Depending on your credit performance your score will lie between these two numbers. The meaning of the scores is as follows;

  • 300 to 500– The score between this range is destined to get rejected. This range is considered as highly risky and low in creditworthiness.
  • 500 to 750– Some financial institutions take a call on this range. Provided the profile of the loan applicant is good enough. If rest everything is close to perfect but due to some mistakes they fell into that range of CIBIL score, the bank/NBFC might consider the file.
  • 750+ – The range above 750 is the best one. An applicant with CIBIL score above 750 is 100% eligible for the loan if other requirements are fulfilled.

Why CIBIL score is so important?

The credit score of any loan applicant plays a major role for the bank to decide whether he/she deserves the loan or not. It is the easiest way to know a loan applicant’s behavior towards repayment of the loans. It tells how responsibly he/she takes the obligation of paying their debts. How financially disciplined they are. A personal loan is an unsecured one, therefore CIBIL score becomes an important decision maker for your loan application.

What if you do not have a credit score?

It is possible that you may not have a credit score at all. It happens when one has never taken a loan before. Someone who has recently become financially independent and capable of applying for a loan will obviously not have any credit history. And hence no credit score as well.

But is that a problem? If we solely talk about personal loan, then yes, it is a problem. A personal loan is given on the basis of your income. How much you earn? And how steady the income is? Having a loan history clears all sort of doubt about your loan repayment intentions and hence helps banks to take a decision. If you are new in this, the lending institution will certainly have some doubts.

What to do in such a situation?

If you do not have a history, create one. There are some simple ways through which you can create your loan history.

  • Consumer loan– Take a consumer loan. The consumer loan is the easiest loan to get. Finance a new television, refrigerator, mobile phone, washing machine, anything that you need or can afford to pay in monthly installments. Once you get it, keep a good repayment track record to generate an impressive credit score for yourself.
  • Mortgage loan– Loans such as car loans, home loans are secured loans. Therefore, you are very likely to get such loans even without having a credit history.
  • Credit card– Even a credit card does not require you to have a credit history. Get a credit card and use it a few times even when you don’t need. Make the payment against it on time. In this way, you can create your credit history very easily.
  • Request your bank– Contact the same bank for the loan in which you are already having your salary account or through which you are are doing most of your transactions for a long time. Valuing your relationship with it, the bank may take a call for you in order to get you the loan.

How to maintain a good CIBIL score?

Are you already having a loan but concerned about how to maintain a good score? It is a matter of concern so that you do not face any problem while applying for a loan in the future. There is nothing much difficult to be creditworthy. All it takes is discipline. Ensure the following points to be a worthy borrower

  • Routine repayment of the loan- Make sure you always keep a sufficient balance in your account on the EMI due date.
  • Special care to credit cards- Most often the credit cards have been found as the reason for the poor CIBIL score for many. Keep a timely cheque on your Credit card payments. Make sure you make the full payment and do not miss any outstanding amount.
  • Make transfers if necessary-  There can be a situation when your EMI is debited from your savings account but you do most of your transactions through your current account. If you forget to transfer the required amount, it may severely affect your creditworthiness. You can avoid it by giving a simple standing instruction to your bank (If both the accounts are in the same bank) to transfer the EMI amount routinely to your savings account.
  • Check your report when in doubt- Whenever in doubt you can easily check your CIBIL score. Even if you are not, you should check your score once a year to self-analyze. In this way, you can avoid repeating mistakes which you might do that affect your score.
  • Avoid taking credits more than your capacity-  Do not take too much of consumer loan or credit cards. Always see first your financial capability.

How to improve your poor CIBIL score?

If you have a poor CIBIL score then it does not mean that you will never be able to get a loan in your life. You can restore the faith of financial institutions in you. The ways through which you can do it are;

  • Have patience- You have to accept it that it will not happen overnight. CIBIL keeps updating your credit score and on the basis of analysis generates your score. And it takes time to do so. If you have a really poor score then you have to be more patient because it will take more time.
  • Take easy loans- Easily available credits like consumer loan or credit cards can improve your CIBIL score.
  • Timely repayment- Make sure you maintain a good repayment track record of the loan you get.
  • Self-analysis- Study your own CIBIL report. Find out what went wrong or what mistakes you did that landed you to the poor score range. Analyze them and try your best to avoid them in the future.

Important FAQs

  1. Why my CIBIL score is negative?

There is nothing unusual in CIBIL score being negative. The person with no credit history has a negative CIBIL score. The score is generated only on the basis of one’s behavior or discipline towards loan repayment. If one has never taken any loan in his life then the CIBIL score will show the negative figures.

2. Can one improve a poor CIBIL score?

Yes, but it will take some time. You can recreate a new credit history for yourself. The easiest way to do so is by taking a credit card or a consumer loan. Do the timely repayment of the credit or EMI and avoid late payment. It will be recorded and will gradually improve your score.

3. Is it necessary to have a good CIBIL score to apply for a loan?

Yes, especially when you are applying for an unsecured loan your poor track record of loan repayment in the past will hamper your reputation enough to get your loan rejected.

4. What if my CIBIL score was affected by the lending company’s fault?

It does happen sometimes when the bank has the standing instructions to transfer the EMI amount to the loan account. The bank may miss doing so making you liable to late payment charges and in turn hampering your credit score. A letter of apology or a NOC can help you avail loan despite having a poor CIBIL score.

5. How often the CIBIL score is updated?

Ideally, the CIBIL score is updated as soon as the bank sends an applicant’s report to the credit agency. It is usually done on monthly or fortnightly basis. Therefore, we can say that CIBIL is updated in every 15 to 30 days.

6. How often should we check our CIBIL report?

We should only check our CIBIL once in a year or before applying for a loan. We must avoid frequently checking our CIBIL score.

7. How much score is considered good for a loan?

The best CIBIL score is 750 and above. It is the most ideal score for an applicant to be eligible for a loan. However, the applicants with a CIBIL score between 500 to 750 can also avail loan if the lending institution is ready to take a call.