I just received a WhatsApp message from one of my YouTube subscribers, that his loan has been rejected multiple times, no matter whether he applied to banks, NBFC or any Instant loan application.
He was in urgent need of some amount so I looked into his Credit Report and found out that his CIBIL score was quite low and was the main culprit in getting his loan application rejected every time.
When you’re thinking about applying for a loan, whether it’s for buying a home, or a car, or funding your education, your CIBIL (Credit) score is one of the most important factors that banks consider.
But what exactly is a CIBIL score, and why does it hold such an important role in the loan approval process?
While looking for credit reports you will find reports from a few different agencies like TransUnion Cibil, Experian, Equifax and CRIF Highmark.
These all agencies hold and share your credit reports. The report shared by CIBIL is called the Cibil Report.
CIBIL (Credit) Score Important for Getting a Loan
What is a CIBIL Score?
A CIBIL score, also known as a credit score, is a three-digit number that reflects your creditworthiness.
This score ranges from 300 to 900, with higher scores indicating better credit health.
The score is generated by Credit Information Bureau (India) Limited (CIBIL), the leading credit information company in India.
Understanding the CIBIL Score Range
300-549: This is considered a poor score, and borrowers in this range may find it challenging to get loans or credit cards. If approved, they are likely to face high interest rates and stringent terms.
550-649: This range is considered fair, but it still indicates a higher risk. The applicant might get approved, but the terms may not be favourable.
650-749: This is considered a good score. Borrowers in this range are more likely to get loan approvals with reasonable interest rates.
750-900: This is an excellent score. Borrowers in this range enjoy the best interest rates, higher loan amounts, and more flexible terms.
A good CIBIL score is a reflection of responsible financial behaviour, and it’s an essential component of your financial profile.
How is the CIBIL Score Calculated?
Understanding how your CIBIL score is calculated can help you manage your finances better and improve your score over time.
The CIBIL score is calculated based on several factors, each contributing differently to your final score:
1. Payment History (35%)
Your payment history is the most significant factor in your CIBIL score.
It records how consistently you’ve paid your credit card bills, loan EMIs, and other credit-related payments.
Late payments, defaults, or settlements negatively impact this part of your score.
2. Credit Utilization Ratio (30%)
This refers to the percentage of your available credit limit that you are using at any given time.
A lower credit utilization ratio is better for your score.
Ideally, you should aim to use less than 30% of your available credit limit.
3. Length of Credit History (15%)
The age of your credit accounts also influences your CIBIL score.
A longer credit history generally means a higher score, as it gives lenders more information about your long-term credit behaviour.
4. Credit Mix (10%)
Having a balanced mix of credit types, such as secured loans (like home or auto loans) and unsecured loans (like personal loans or credit cards), positively impacts your score.
It shows that you can manage different types of credit responsibly.
5. New Credit (10%)
This factor considers the number of new credit accounts you’ve opened recently and the number of inquiries made by lenders.
Too many new accounts or inquiries in a short period can lower your score, as it may indicate financial instability.
Why is a CIBIL Score Important for Getting a Loan?
A good CIBIL score is more than just a number; it’s a reflection of your financial health and plays a crucial role in the loan approval process.
Here’s why your CIBIL score is so important:
1. Determines Loan Eligibility
Your CIBIL score is one of the first things a lender (Banks/NBFC) checks when you apply for a loan. It helps them assess your creditworthiness.
If you have a high score, it indicates that you are likely to repay the loan on time, making you a safer bet for the lender.
On the other hand, a low score may signal a higher risk, leading to your loan application being rejected or approved with stringent conditions.
2. Influences Loan Interest Rates
The interest rate on your loan is directly influenced by your CIBIL score.
Borrowers with high scores (typically 750 and above) are often offered lower interest rates.
This can save you a significant amount of money over the life of the loan.
Conversely, if your score is low, you might still get the loan, but at a higher interest rate, making your loan more expensive in the long run.
3. Decides Loan Amount and Terms
Lenders also use your CIBIL score to determine the loan amount they are willing to offer and the terms of the loan, such as the repayment period.
A higher score could mean a larger loan amount with more favourable terms, like a longer repayment period or lower fees.
On the other hand, a lower score might limit the loan amount you can borrow and result in stricter terms.
4. Reflects Financial Responsibility
A good CIBIL score reflects that you are financially responsible. It shows that you manage your debts well, pay your bills on time, and are not overly reliant on credit.
This builds trust with lenders, making them more willing to lend to you.
5. Improves Chances of Pre-Approved Loans
Many banks and financial institutions offer pre-approved loans to customers with high CIBIL scores.
These loans are often processed faster, with less paperwork and better terms, making the borrowing process much smoother.
6. Enhances Negotiation Power
A high CIBIL score gives you more negotiating power when discussing loan terms with lenders.
You can negotiate for better interest rates, lower processing fees, or more flexible repayment options.
Lenders are more likely to accommodate your requests if they see you as a low-risk borrower.
How to Improve Your CIBIL Score
If your CIBIL score isn’t where you want it to be, don’t worry—there are steps you can take to improve it.
Here’s how you can boost your score and increase your chances of getting a loan with favourable terms:
1. Pay Your Bills on Time
Timely payment of your credit card bills, loan EMIs, and other dues is the most effective way to improve your CIBIL score.
Set up reminders or auto-payments to ensure you never miss a due date.
2. Keep Credit Utilization Low
Try to use only a small portion of your available credit limit.
For example, if your credit card has a limit of ₹1,00,000, try to keep your monthly spending below ₹30,000.
High credit utilization can signal financial stress, which may lower your score.
3. Avoid Applying for Too Many Loans or Credit Cards
Each time you apply for credit, it results in a hard inquiry on your credit report, which can lower your score slightly.
Multiple applications within a short period can significantly impact your score. Only apply for credit when it’s necessary.
4. Maintain a Healthy Credit Mix
Having a balanced mix of secured and unsecured credit products, such as a home loan, car loan, and credit card, can improve your CIBIL score.
It shows that you can manage different types of credit responsibly.
5. Check Your Credit Report Regularly
Errors in your credit report can drag down your CIBIL score. Regularly checking your credit report allows you to spot and report any inaccuracies.
You can request a free credit report from CIBIL once a year to monitor your credit health.
6. Don’t Close Old Credit Accounts
Older credit accounts contribute to the length of your credit history, which positively impacts your CIBIL score.
Even if you’re not using an old credit card, keeping it active (with occasional small purchases) can help maintain a good credit score.
Your CIBIL score is a critical factor in your financial life, particularly when it comes to getting a loan.
It determines your eligibility, influences the interest rate, and can even affect the amount you can borrow and the terms of your loan.
By understanding how your CIBIL score is calculated and taking steps to improve it, you can position yourself to get the best possible loan offers.
Remember, building and maintaining a good CIBIL score is an ongoing process that requires careful financial management.
Pay your bills on time, use credit wisely, and regularly monitor your credit report.
With a strong CIBIL score, you’ll not only have an easier time getting loans, but you’ll also enjoy better terms, lower interest rates, and greater financial flexibility.
FAQs:-
1. What is a CIBIL score?
A CIBIL score is a three-digit number that represents your creditworthiness, ranging from 300 to 900.
2. Why is my CIBIL score important?
Your CIBIL score is important because it affects your ability to get a loan, the loan amount, and the interest rate.
3. What is a good CIBIL score?
A good CIBIL score is typically 750 or above.
4. How can I check my CIBIL score?
You can check your CIBIL score online through the official CIBIL website or other financial services websites.
5. Does checking my CIBIL score lower it?
No, checking your own CIBIL score does not lower it.
6. How can I improve my CIBIL score?
You can improve your CIBIL score by paying your bills on time, keeping your credit utilization low, and avoiding multiple credit applications.
7. How long does it take to improve a CIBIL score?
Improving a CIBIL score can take several months, depending on your financial habits.
8. Can I get a loan with a low CIBIL score?
Yes, but it may be more difficult, and you might get higher interest rates or lower loan amounts.
9. What happens if I miss a loan payment?
Missing a loan payment can lower your CIBIL score and affect your future loan eligibility.
10. Does having no credit history affect my CIBIL score?
Yes, having no credit history can result in a low or no CIBIL score, making it harder to get loans.
A good credit score (800+) helps you count in the top 1% of credit users list. Small loans and multiple credit cards are the biggest reason for credit loss. Some random small credit apps put credit inquiries in my account and my credit score went as low as 715. After almost 1 year it’s now reached 780.