Leveraging your CIBIL score to get a personal loan

Written By- Jaya Pathak

What is a CIBIL score?

Our credit score is a three-digit number that tells banks and other lenders how capable you are to repay your loans. Technically speaking, it tells the lenders the chances of you defaulting your loan. Higher the number, lower the chances of default. Banks and other financial institutions use this number to decide whether you are alone worthy or not. In a nutshell, credit score basically reflects how well you have managed your credit in the past and credit here means all types of loans – a personal loan, home loan, your credit cards or even the buy now pay later loans and so on.

Impact of good and bad credit score

Credit score can be in the range of 300 and 900. A score above 750 is considered a very good score by the lenders. It shows that you have always repaid your loans on time and just like a good academic score in school what get you a very good college very easily, a good credit score will help you to get new credit at lower interest rates. In fact, several data says that 80% of the loans that get approved have a score above 750.

If you have a slightly lower credit score, say between 651 and 750, banks see you as an average borrower. You can get a loan but at higher interest rates. If your credit score is between 501 and 650, banks see you as a poor borrower with some defaults in the past period even if banks agree to lend to you, they will charge a very high interest rate. If you fall in the very poor borrower category with multiple defaults in the past, it will be very difficult for you to get a loan.

Factor influencing CIBIL score

Well, there are multiple factors that can hold your CIBIL score, we will look at the major ones: –

1. Payment history: Payment history is the most important piece of your credit profile. It accounts for roughly 35% of your scores.  If you have been responsible in the past, you can probably be trusted in future. So, avoid late payments at all costs. It is given 35% weightage while calculating credit score. Even a single missed EMI can reduce your credit score by 60 to 70 points.
2. Credit utilization: Amounts owed or credit utilization as the second most important factor coming in at about 30% of your score. This part is important because notching a good credit score doesn’t mean that you don’t borrow. In fact, not using your credit is almost worse than using tons of it. You want to show that you can handle a reasonable amount of depth without going off the rails.  If you are eligible for a total credit of, say ₹10,00,000 and you have consumed 5,00,000 in your credit cards, it means you have utilized 50% of the credit. A credit utilization of over 30% is seen as negative for your credit score.
3. Length of your credit history: One of the more obvious factors in our credit score is the length of your credit history which accounts for 15% of your number. It is like in those old movies where a shop you want to let’s one of his regulars run up a tab because he knows he’s good for it. Same goes with credit period the longer you have been borrowing, the better.
4. Types of credit: Types of credit accounts 10%. It reviews how many sources of borrowing you use like a car loan, mortgage, credit card.  The more diverse, the better.
5. New credit:  New credit accounts for 10%. It takes into account how often you take on credit you don’t need like applying for a credit card at five of your favourite new stores.
6. Defaulting on loans: If you have defaulted on a loan in the past, your chances of getting fresh credit is almost 0 similarly settling the loan or credit card account instead of paying it in full can also hold your score.
7. Errors in credit report: Sometimes there may be errors in your credit report that portray you as a higher credit risk than you actually are. It can negatively impact your credit score.
8. Applying for a lot of credit quickly: If you inquire for multiple loans in a short time, it shows that you are credit hungry which can damage your credit score. In a nutshell inquiring multiple loans in a short time reduces your credit score.

Importance of a Good Cibil score for personal loans

A good CIBIL score offers the following benefits:

• Banks and other financial institutions will approve your loans with a lower interest rate.
• A higher CIBIL score reflects responsible credit behaviour. It will make lenders more willing to offer competitive interest rates.
• Individuals with a good CIBIL score often get a favourable repayment terms encompassing longer durations and lower EMIs.
• A good CIBIL score can help you to qualify for a higher loan amount.

How to improve your CIBIL score?

You can adopt following strategies to enhance your CIBIL score: –

1. You can pay your credit card bills, EMIs and utility bills timely. It will contribute in improving your score significantly.
2. If you maintain a lower credit utilization ratio, it will enhance your chances to improve CIBIL score. You might use less than 30% of your total credit limit as it will improve your credit score.
3. You can avoid applying in multiple loans. If you will apply for loans more frequently, it will picture you as a credit hunger. It will negatively impact your credit score.
4. You can regularly monitor your credit score. If you find any inaccuracies or irregularities, you can simply report it to the concerned authority.
5. You can manage a balanced mix of secured and unsecured credit which will contribute to a healthy score.
6. You should avoid defaulting on payments as it will damage your credit worthiness.

What are the steps to leverage your CIBIL score for a personal loan?

1. You can check your cibil score from the authorized credit bureaus before applying for a personal loan. If your score is below 700 then you can improve it before submitting an application.
2. You can research and compare various financial institution that offer loans tailored to your credit score and financial needs.
3. You can apply for the loan amount which aligns with your income and repayment capacity which increases the chance of approval of your loan amount.
4. If you’re credit score is not exceptionally high then you can highlight financial stability such as steady income source and employment history. It will enhance your credibility.
5. You can apply with a Co borrower or with a guarantor who have a high credit score than you. It will if proof your loan approval chances and get you loan with better interest rates.

Conclusion

In a nutshell, the credit score plays a pivotal role in obtaining a personal loan. If you can maintain a high score then you can enhance the potential of approval of your loan. You can get loan more seamlessly than others.

Add Business Connect magazine to your Google News feed

Must Read: