CIBIL Score and Loan Eligibility: Overview
In today's fast-paced world, people grapple with unpredictable situations economic turmoil, national crises, volatility in the financial markets, stock market crashes, pandemic, job losses, and more. At times such as these, you can find yourself financially strapped despite your best effort. Even when all is well with the world around, personal issues, such as a medical emergency or an unavoidable big-ticket expense, can arise out of the blue. There can also be a situation wherein, despite the lack of urgency, you fall short of funds for planned expenditure. Now, across all three scenarios, the best recourse would be to avail of a credit facility such as a personal loan, business loan, and more.
Now irrespective of the type of loan, the approval depends primarily on your CIBIL score. To put it simply, the CIBIL score reflects your creditworthiness and can help you easily receive a loan of your choice. Conversely, if your CIBIL score is not in the optimum range, you face the prospect of loan rejection or getting one at expensive interest rates. Therefore, before you apply for a loan, it is imperative that you check your CIBIL score.
Understanding the CIBIL Score
In the country, credit information companies, such as TransUnion Credit Information Bureau (India) Ltd (CIBIL), generate the three-digit credit score for individuals. The credit score generated by TransUnion CIBIL is popularly known as the CIBIL score. Numerically, the score can range from a minimum of 300 to a maximum of 900. Across financial institutions, an excellent CIBIL score is one that is above 750. A CIBIL score of 750 and above can convince the lending institution about your repayment capacity and overall creditworthiness. According to a report published in the New Indian Express on April 30, 2021., 90% of loans approved tend to be of those borrowers who have a CIBIL score of 750 or above.
Variables Involved in CIBIL Score Calculation
Before you check your credit score, you must know the factors affecting it. This score is directly dependent upon your past financial behavior. The variables involved in the calculation of the CIBIL score are:
- Credit Repayment History: If you have met your past credit obligations in a timely manner, you can expect to have a good CIBIL score.
- Credit Utilisation Ratio: This shows the amount of credit actually used from your available credit limit. If you frequently reach the maximum credit limit, it can negatively impact your CIBIL score. Ideally, you should strive to keep your credit utilization ratio between 30%-40% of the available limit.
- Credit Mix: Your credit mix shows the choices you have made in utilizing secured and unsecured credit facilities. To have an optimum CIBIL score, you should have a healthy mix of both types of credit facilities judiciously.
- Length of credit history: The age or length of your credit history plays a crucial role in determining your overall CIBIL score. The age of the credit history is the average number of years for which you have a credit account. An optimum credit age reflects that you have sound experience in managing credit.
- Credit Inquiries: If you have made repeated credit inquiries with multiple financial institutions, it can have an adverse impact on your CIBIL score.
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Reasons Why Financial Institutions Check the CIBIL Score
Your CIBIL score and loan eligibility are closely intertwined. A financial institution will check your CIBIL score for the following reasons:
To Understand Your Credit Repayment Pattern: Using the CIBIL score, a lending institution can know your past patterns regarding credit repayments. If you have repeatedly defaulted on your EMI obligations in the past, it does not reflect well on your creditworthiness.
To Know Your Repayment Capacity: Any lending institution must differentiate between high-risk and low-risk borrowers. A good CIBIL score indicates a low-risk borrower who has the capacity and financial discipline to repay the loan.
To Calculate the Interest Rate and Loan Amount: Once the lending institution knows your CIBIL score, it will then use it to calculate the interest rate and determine the actual amount of loan to be disbursed. Individuals with a good CIBIL score can expect reasonable rates of interest along with disbursal of the required loan amount.
Want to Check Your CIBIL Score Instantly?
To instantly check the CIBIL score online, you can visit the official CIBIL website. To access your complete CIBIL report, however, you have to take a subscription for 1 month, 6 months or 12 months, and pay the requisite fees.
Wondering how to check the CIBIL score sans any charges? For a free CIBIL score check and credit report, you can visit a loan aggregator platform. Here, you also receive free financial health reports detailing your credit history and a summary of your accounts. These reports can also guide you to improve your score.
Does A Low CIBIL Score Mean End of the Road for Borrowers?
A good CIBIL score is a prerequisite for loan approval. However, if a CIBIL score check reveals low figures, it does not mean that you have exhausted all your chances of securing credit at affordable rates. You can take some requisite steps to enhance your score over time. Here is a look at how:
- Make Timely Payments: You might have defaulted in the past, but to improve your CIBIL score from this point in time, make timely payments for your existing debt obligations. You can also try to clear your past dues quickly by making prepayments or part-prepayments.
- Consider Debt Consolidation: If you have several debts, consider consolidating them into one to reduce the burden of your existing credit obligations.
- Maintain an Optimum Credit Utilisation Ratio: According to market experts, individuals should aim for a 30% credit utilization ratio. For instance, if you have a credit limit of ₹1 lakh, you can spend up to ₹30,000. A healthy credit utilization ratio will result in a better credit score.
- Strike a Balance Between Different Credit Types: To boost your CIBIL score, you should strike a balance between different types of loans such as secured and unsecured loans.
- Avoid Multiple Loan Applications: To improve your CIBIL score, avoid applying for several loans at the same time. Multiple credit applications within a short duration negatively affect your credit score.
- Check Your CIBIL Score Regularly: Market experts suggest checking your CIBIL score after every six months. In case of any errors, which can affect your score negatively, you can get them corrected by raising an online dispute.
Is a Good Credit Score Sufficient for Loan Approval?
Though the relationship between CIBIL score and loan eligibility is intrinsic and can help you receive an unsecured loan at affordable rates, it is not the sole eligibility criteria. So along with checking the CIBIL score, make sure that you fulfill the other eligibility conditions as well. These include criteria around income, age, place of residence, work experience, and so on.
It can be safely said that the CIBIL score is of utmost importance among the various loan eligibility conditions. But if you fail to fulfill the other stipulated conditions, such as those for income and age, your loan cannot be approved.
The Final Word
To sum up, you must check the CIBIL score before making a credit application. A good CIBIL score can allow you to negotiate and get the best deal – including an affordable interest rate, desired loan amount, and preferred repayment tenor – from a lending institution across different loan types.
A good CIBIL score underscores your financial commitment to repay your dues. However, a score less than the optimum does not spell complete disaster. To build up a damaged CIBIL score, you can still take concerted steps to improve the score gradually and qualify yourself for loans.
