Importance of CIBIL Credit Score in Indian Loans:
Your CIBIL credit score is an indication of your financial stability and helps lenders decide if you are an individual worth taking a credit risk or not. Basically, a credit score tells the lender what’s the probability of you paying back the loan that you have sought.
Your CIBIL credit score is calculated on your history of credit usage and the way you have handled past payments. If you have been regularly paying off your equated monthly installments (EMIs) and haven’t defaulted you have a higher score. If you use credit in moderation, and don’t go about borrowing beyond your means, you will have a higher score, which in turn improves your credit rating.
Scores between 700 and 800 are considered to be good, but now lenders are enforcing stricter norms. If you have a score below 650, it is most likely that your loan application will be rejected or you will have to pay very high rates of interest. If you have a score below 600, you won’t get a loan.
The lower your CIBIL credit score, the higher is the probability of default. You should access your score at least once in a year so that you get an indication of your credit rating. If you are planning to take a big loan (for example, a home loan) in the next 24 months, then it is advisable that you check your score every six months so that you can improve it and increase your chances of getting a loan.
What will affect your Credit Score?
If you have no credit history, creditors may treat you the same way as if you have had bad credit. This might seem unfair, but the rationale behind is that you have not established a history to show that payments are made over an extended period of time.
Score parameters: The credit score of every person is different and is an evidence to varied credit behavior. The credit score is not a permanent one. It is extremely dynamic and keeps changing as a person changes his financial behavior.
The score is calculated based on the person’s credit profile parameters at that point in time. It is important to know that the following parameters are taken into consideration while calculating a consumer’s credit score:
Credit Utilization: How much credit is being used? Consistent high utilization of the credit limit is unfavorable, and vice versa, the lower your credit utilization, the better. As it suggests that one is using a small amount of the credit that’s been provided to them.
Defaults/Repayment History: how many accounts are due in past – by how many days and by how much value? If you have already taken any loan your payment history is the most important factor that determines your credit score. Regular repayment of loans means you are awarded a higher score. If you have missed payments, delayed or defaulted on payments, your score will be much lower.
Secured versus unsecured loans: If your credit portfolio has a higher percentage of secured loans (auto loans, home loans), your credit score will be higher. If you have a large number of unsecured loans (credit cards and personal loans) it shows bad money management and results in a lower score.
Credit Inquiries: If you have too many inquiries against lending institutions for any kind of credit facility, no matter that you have been granted the loan, it reflects poorly on your credit score. It shows that you are in constant need of funds.
Credit Age/Trade Attributes: How old are the consumer’s lines of credit? What type of credit does he have? Does the consumer have a good mix of credit or is it all credit cards?”
Five Steps Improve Credit Score
In today’s time, the need for credit is very imperative. If you have defaulted on your payments for any reason, your credit information report will promptly report it. With a bad credit report, you are unlikely to get any loan or credit card from any bank. However, that does not mean you are scarred for life.
Rebuilding your CIBIL score is a slow process. Follow these simple steps that help you to improve your credit score.
Pay off existing debts. The most effective way to improve your credit score in this area is by paying down your revolving (credit cards) debt. In fact, owing the same amount but having fewer open accounts may lower your score.
Opt for a secured credit card, which is usually given against the security of your fixed deposits. ICICI Bank, HDFC Bank and Axis Bank are the three banks that issue secured credit cards in India.
Go for a Consumer Loan (T.V, Refrigerator, other Home needs) by providing PDC (post dated Cheque) as security and repay the entire loan without any delays.
Go for a personal loan using an asset as collateral or as an unsecured loan. Paying dues towards this loan on time for the next 12-24 months will help in reviving your credit history.
Don’t make too many inquiries for more credit cards and loans. Also, abstain from taking huge loans until your score has improved and you are financially healthy.
Usually, CIBIL maintains your credit history for 7 years but displays month-by-month repayment record for the last 36 months. This essentially means that if you are on a clean slate post repayment of your old debts, and promptly pay your new dues and loans, your credit history will start looking up after three years.