What is CIBIL score?
Credit Information Bureau India Limited (CIBIL) is a body that issues the credit report of an individual. Founded in the year 2000, CIBIL has since become a crucial part of the banking system. An individual’s credit worthiness is known by his CIBIL score.
How is CIBIL score calculated?
The amount of credit taken by an individual from any bank or lending institution in his name is recorded. The repayment pattern – part/full EMI payments, on-time payments, delayed payments are also recorded. Any negative notes from the bankers during the loan cycle and loan enquiry changes the score. Loan enquiry is when a borrower approaches the bank to enquire about his loan eligibility, the bank checks his credit score and records the reason for check as ‘enquiry for loan’ in his CIBIL score document. This is also called a “hard enquiry”. The solution to this is to request the banker to mention the loan amount to the applicant without checking on the CIBIL score for enquiry.
Loan cycle is the lifecycle of the loan being processed. Here’s the loan cycle explained in stages.
Stage 1 – Applicant submits his loan application to the bank.
Stage 2 – Bank prepares credit worthiness report of the applicant.
Stage 3 – If the bank deems the applicant fit for availing the loan as per the credit worthiness report prepared, loan moves to the closing stage.
Stage 4 – Application fee and other similar fee for the loan to be processed by the bank is paid to the bank by the applicant.
Stage 5 – Loan amount is disbursed to the borrower’s bank loan account.
Stage 6 – Loan repayment cycle begins. Principal and interest amount to be paid every month or quarterly, as decided by the bank and applicant while submitting the loan application.
The higher the credit score, the higher the credit-worthiness of an individual and vice versa. Read more about how CIBIL score is calculated here.
What are the benefits of high CIBIL score?
If you want to get a loan or credit card, your CIBIL score is checked before you are issued the credit. These are the benefits of having a high CIBIL score.
- Reduced interest rates on loan
With a high CIBIL score, one can avail loans at a reduced rate of interest than the normal interest rates specified.
- Higher loan amount sanctioned
Since the bank is convinced of your good credit history and is assured that you will repay on time, you can negotiate with the bank to get higher amount of loans sanctioned.
- Quick loan approvals
TransUnion CIBIL is a recognized institution that regulates the financial credit worthiness of Indian individuals. All the banks in India are aware that every financial aspect of an individual is recorded using which the CIBIL score is calculated. So, if your CIBIL score is above 750, you are bound to receive loans quickly.
- Attractive credit card offers
Since you do not borrow heavy amounts of money, your reliability on credit is low. Also, when you repay your EMI dues in full and before the due dates, it shows you are responsible with your money. This reflects in your score and banks are willing to offer you special and attractive credit card offers where you can save more.
How can I improve my CIBIL score?
Now that you know the benefits of having a high credit score, I bet you want to improve your credit score and enjoy those benefits. Here’s how you can improve your score:
- Timely payment of EMI
Make your EMI payments in full and on time every month. Part payments and skipping payments is recorded negatively by the banks. This in turn, affects your credit score.
- Raising credit card limit
You can check if the banks are willing to offer you extra credit and increase the limit of your credit card. High credit limit on your card yet low utilization shows that you are a responsible spender. This in turn increases your credit rating.
- Don’t exhaust your credit limit
Just because you have a credit limit of Rs.10 lakh on your credit card, does not mean you borrow Rs. 10 lakh a month. Keep your credit limit on your credit cards high, but do not borrow to the highest capacity. Keep your borrowing and spending limits to a minimum and use your credit card efficiently. Overuse and misuse of credit cards leads to a low credit score. High borrowing indicates your high reliability on the bank for your regular spending habits. When banks see that you like to spend more than you earn, they are wary of lending later on because they are not sure if you will be able to repay the entire amount back along with the interest due.
- Don’t make constant loan enquiries in a row
It is a common practice among the people of the subcontinent to enquire from several places before deciding on which one to opt for. The same goes while enquiring for loans. If you want to get a loan, do not approach several banks at once to find out your eligibility and the amount they are willing to loan you. When you approach a bank to make an enquiry, they check your CIBIL score before telling you the amount you are eligible to receive. This checking of score by the bank reduces your score. When the same happens with several banks in the span of a few days, your credit score will come down drastically within a month even if it was higher earlier.
The best way to make enquiries is to get information about their loan plans and compare the features, benefits, repayment periods and interest rates. Once you have shortlisted 1-2 banks and plans that you want to opt for, check only at those two banks to find out the exact amount they will loan you.
- Do not repay in lump sums
If you have a chunk of loan amount yet to be repaid, it is understandable that you want to make large amounts of payment as and when possible, to close the loan faster. What this does is, reduces the principal amount based on which interest is calculated and foils the loan repayment calculation of the bank. If bank marks this negatively, it lowers your credit score.
- Check CIBIL report regularly and remove errors, if any
It is a good idea to check your CIBIL report month-on-month. This will give you an overview of the fallbacks and you can get the errors corrected immediately. When you see that a delayed payment or any other reason has lowered your score, you can correct it in the forthcoming months.
It takes time to build trust with your new bank loan. Hence, lending institutions look for your CIBIL score to see your past credit history and determine your credit-worthiness. Having a high CIBIL score is not only helpful until the time you get a loan sanctioned, but until the time you have a financial holding. Let’s face it, as long as you are an Indian resident, your financial credit worthiness is determined by your CIBIL score. So go ahead and use the above ways to improve your CIBIL score and maintain it high consistently.