Do you have a high CIBIL score? Know its importance for a personal loan
A personal loan is one of the most popular borrowing options for people who are looking for quick access to funds for a variety of personal reasons. However, the unsecured (unsecured) nature of this loan makes it vitally important for lenders to ensure the creditworthiness of the applicant. In this regard, one of the first things that potential lenders look at is the credit score of the loan seeker. As TransUnion CIBIL is arguably the most popular credit score provider in India, it cannot be overstated the importance of a good CIBIL score (750 and above) for getting a personal loan.
What is the CIBIL score?
The credit score provided by TransUnion CIBIL as part of an individual’s CIBIL report is commonly referred to as the CIBIL Note. This is a 3-digit number between 300 and 900 that is calculated based on your credit history. A score closer to 900 such as 750 or higher is generally considered a good score and by the same logic, a score closer to 300 is considered a bad CIBIL score.
A good CIBIL score indicates higher creditworthiness through responsible past credit behavior and a good repayment history. Thus, this indicates a reduced risk of default for the lender. While credit rating is not the only criteria determining a person’s ability to obtain a personal loan, it is one of the first things lenders look at when assessing loan applications. Having no credit history or a bad credit rating, the lender doubts a person’s repayment capacity because they cannot assess the risk or see the applicant as a higher risk borrower.
Factors Affecting CIBIL Score
While the exact formula for calculating CIBIL score based on an individual’s credit history is proprietary and protected information, here are some of the key factors known to impact your score:
Refund history: This is perhaps the most important thing to keep in mind – always pay your loan IMEs and credit card dues on time. While it may seem simple enough, not following this simple rule is a common and easily avoidable mistake. While missing your payment due date once or twice in a decade may not have a significant impact on your CIBIL score, doing so regularly will. But that’s not all. What can really have a long-term negative impact on your CIBIL score is the settlement or default of a loan / credit card. Such actions have a negative impact on your long-term score (up to 7 years).
Credit utilization ratio: This is a simple ratio of your current debt to your assigned credit limit for all credit cards and all active loans. Ideally, you should keep it below 30%, that is, limit the use of credit to 30% or less of the assigned limit for all forms of credit. Lower use of credit indicates fiscally responsible behavior that has a positive impact on your credit score.
Credit mix: In India, credit can be of two types: secured credit like home loans, car loans, secured credit cards, etc. and unsecured credits like personal loans and credit cards. Having too much unsecured credit can give the impression that you are at a higher risk of future default. Maintaining a balanced mix of secured and unsecured credit can help you maintain a high CIBIL score.
Age of credit history: The older your credit card or loan history, the better your CIBIL score will be, provided you’ve managed them well. A longer history of prudent credit use indicates that your chances of being financially prudent in the future are higher. This is also reflected in your CIBIL score, however, the impact of age on credit history is likely lower than on your repayment history.
How does a high CIBIL score affect your personal loan eligibility?
As mentioned earlier, personal loans are unsecured in nature which, from the lender’s perspective, means that in the event of default, the lender cannot seize any assets to recover the cost of the loan. This is what forces lenders to establish strict personal loan eligibility guidelines regarding CIBIL score, age, income, repayment capacity, etc. for applicants. The main reasons why a high score affects your personal loan eligibility is how a high CIBIL score is perceived by lenders. Here are some ways that lenders perceive the high CIBIL score of potential personal loan applicants:
Good repayment record
Clean up credit history
Current low / manageable debt levels
From a lender’s perspective, all of the above indicates a lower risk of default if they lend to you. This is how a high CIBIL score increases your chances of being approved for a personal loan. Plus, you might even be eligible for additional benefits in the case of some lenders. Besides the eligibility itself, some key benefits that you could enjoy by maintaining a high credit rating include:
Now that you have an idea of how important a high CIBIL score is when it comes to personal loan eligibility, the obvious question is of course – What should I do to make sure I maintain a score of high credit? The following is a checklist of best practices for improving / maintaining a high CIBIL score and improving your chances of getting new loans and / or credit cards in the future:
What to do
What you should not do
Pay all your EMI loans and credit card bills on time and in full
Never default / pay off your credit card debt or loan (unless absolutely necessary)
Borrow only what you need
Apply for multiple loans / credit cards from different lenders at the same time
Maintain a low (
Check your credit report at regular intervals and correct errors immediately (if any)
Keep a balance between secured and unsecured debt
Don’t open / close credit card or loan accounts on the spur of the moment
Increase your credit card limit when available
Don’t overspend, even if you have a high limit on your card or have access to low interest loans
If the above list sounds straightforward to you, it’s actually quite easy to improve / maintain a high credit score. The real difficulty is that you have to keep doing these seemingly simple things for the long haul.
While in the sections above we have discussed the vital role that a high CIBIL score plays in your personal loan eligibility, you should always remember that this is not the only consideration. Lenders also place great importance on your income, age, employment history, number of dependents, etc. because they can have an impact on your repayment capacity and by extension on your risk of default. So make sure you meet all the eligibility criteria set by your potential lender before submitting your personal loan application.