Why do you need to Improve your CIBIL Score?

Two colleagues – Chandan and Nitesh work for the same MNC Company in Bengaluru. Both of them had been house hunting for some time and eventually zeroed down on similar flats in the same project. Like most, they decided to go for a home loan. But things changed here. Chandan had to pay a whole 1.5% more than Nitesh on his home loan because his CIBIL (Credit Information Bureau (India) Limited) score was 684 whereas Nitesh’s score was 791.

And just to understand the gravity of this 1.5% difference in loan rates, here are the numbers for Rs 50 lac home loan taken for 20 years:

  • Nitesh (8%) – EMI of Rs 41,822 and Total Interest Payment in 20 years = Rs 50.4 lac in addition to principal repayment of Rs 50 lac
  • Chandan (9.5%) – EMI of Rs 46,607 and Total Interest Payment in 20 years = Rs 61.9 lac in addition to principal repayment of Rs 50 lac

That’s a difference of almost Rs 5000 in EMI and more than Rs 11 lac in additional interest payments. I am sure Chandan would have never thought that his failure to pay credit card bills on time (and negative impact on credit score) would come back to haunt him like this.

The moral of the story is that loan eligibility is strongly linked to whether or not loan applicants settle their debts on time. If you find yourself defaulting on credit card payments and EMIs often, you need to start thinking about your CIBIL score.

Credit scores play a very important role in deciding whether you get a loan or not.  And that’s not all, they also impact the eventual home loan rate for you.

Why is it so? Because your credit score is a measure of your credit-worthiness. And therefore higher the score, higher your chances of getting a loan and getting it at lower interest rates. And if you have a good score, you can also negotiate the interest rate and other charges with your lenders.

But most people are unaware of these things about credit score. Many also aren’t aware that when they go for loans, all the lenders check CIBIL score first. And not just loans, even the mobile operators may check your CIBIL score to decide your postpaid credit limits!

So…

What is CIBIL score?

CIBIL score, or credit score, is very simply a 3-digit snapshot of your entire credit history across loan categories and credit cards. Scores vary between 300 and 900 and can be found in your CIBIL report.

The moment you take any loan or any credit from a bank or a lender (like credit cards), you activate your credit history. You immediately start leaving footprints of your credit behaviour. Each such behaviour (repayment is timely or not, is it in full or not, is it secured or unsecured, how much credit limit has been utilized, etc.) acts as a data point that goes towards making of your final credit score.

Why is it important?

I am sure it would be already clear as to why it’s important to have a high credit score as was illustrated in the example used earlier. The benefits of having a good CIBIL score are lower rates of interests on loans that you may need in future. And this is applicable across categories like personal loans, home loans or car loans. – applicants with a higher CIBIL score enjoy lower rates of interest.

Your credit score is used by lenders to determine how trustworthy you are when it comes to repaying loans. A high credit score creates the right image of you in front of lenders.

There are around 4 credit information companies in India – Transunion Cibil Ltd, Equifax Credit Information Services Pvt Ltd, CRIF High Mark Credit Information Services Pvt Ltd and Experian Credit Information Company of India Pvt Ltd. All of them use the same data of your credit behaviour. But since their credit score algorithm may differ slightly, the definition of what is a good credit score may differ from one company to other.

What is a good CIBIL score?

It actually depends on the lenders as some lenders place the bar for a desirable credit score at 700 and others show preference to applicants with a CIBIL score that exceeds 750. But in general, if your score is between 700 and 900, you are considered eligible for a loan. And a CIBIL score between 550 & 699 is generally considered to be average.

And it goes without saying that for a person with low CIBIL score, it is difficult to get a loan, if not impossible.

But do remember that your credit score is a dynamic number. What it is today may differ from what it will be tomorrow. It is dynamic and responds to changes in your credit behaviour. If you are regular with your loan repayments and credit card repayments, your credit score is likely to improve. But if you miss your EMI payments or delay them, then it will gradually pull down your score.

And there is another interesting aspect. If you have never taken a loan or do not have a credit card can, then you need to understand that there is no record to base your score on. So if you have no credit history, then lenders will be hesitant in lending to you as they will be unable to evaluate your repayment ability. And due to lack of credit history, if you do get loan somehow then the interest on which you are provided credit may be very high. So if you are planning on taking a large loan in later years but have not taken any loan in past, then taking some credit is not all that bad and moreover, it is actually essential to build a good credit profile.

Where can you check your CIBIL score? What is the best way to obtain a free CIBIL report?

You can check your CIBIL score on the CIBIL website by entering a few personal details. Alternatively, you can get a free Financial Health Check Report online. Your free CIBIL report is personalised, simplified and provides you with a number of insights to help you make informed decisions.

What if I’ve never had a credit card or a loan?

This makes you a first-time borrower and results in a CIBIL score of -1. Some banks restrict the amount offered to loan applicants who are first-time borrowers and as a result, having no credit history can play out negatively. This is because not having a credit history means that the lender has no idea whether the borrower is low risk or high risk.

However, this is not a blanket rule. In such cases, other factors are taken into consideration while determining your eligibility such as salary, job stability, among others.

How to ensure a good credit score?

Paying credit card bills and EMIs on time, using less than 40% of your credit limit on credit cards, when taking loans, then ensuring a healthy mix of secured and unsecured loans is essential. It is also said that making sure your EMI does not exceed 50% of income will help to maintain a healthy CIBIL score.

Is monitoring my credit score of any significance?

Yes, it is a good idea to keep tabs on your credit score and ensure that your CIBIL reports are error-free. And that is because the disputed transactions hurt credit history even if the merchant or bank is at fault. If you have doubts and if the amount is manageable, it’s better to pay up early and then try to get the amount reversed on your cards. Because if you withhold payments, the disputed transaction’s amount will keep accumulating interest and penalty and become bigger. Eventually, even after the dispute is resolved, it is difficult to predict how it will update the credit record and how exactly it will impact the credit score.

In addition to checking your financial health, you can also check your overall loan eligibility. Once you’ve determined your eligibility, you can apply for the Personal loan. Though its best to not take multiple personal loans unnecessarily and aim for a debt-free life, if you do need to take personal loans, then its best to keep it at the bare minimum possible. And as mentioned earlier and if used carefully, controlled borrowing can be a healthy habit to build a good credit score. But you need to pay on time and not borrow unnecessarily.

Just because you are getting loans at competitive rates or low rates doesn’t mean that you should push yourself towards a debt trap. Spending today what you will earn tomorrow is not healthy.

Coming back, you would by now have understood why monitoring your credit score and keeping it above the threshold for a good score is necessary. Risk-based pricing in lending is a reality across the globe. So the lenders will continue to offer better terms & conditions and obviously, a lower rate of interest to customers with a good credit score. And as a borrower, that is all you want. Right?

Remember that your credit score is instrumental in highlighting how creditworthy you are in the eyes of the lender. And as a result, it also decides how easy or tough it is for you to get a loan (and at what interest rates). So since a good credit score can make your financial life a lot smoother, it is in your interest to find out what your credit score is and to improve it if necessary.

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