My friend Suresh had a shock last month, when his home loan application was rejected by the bank. Though he is having an annual CTC of 20 lakhs, bank rejected his application because of his low CIBIL score.  What was the reason for his low CIBIL score? How he can improve his CIBIL score? Will he get loan in future?

Credit Information Bureaus in India

The leading credit information bureaus in India are Credit Information Bureau (India) Ltd (CIBIL), Equifax, Experian, and Highmark. Lending institutions will share their data with these bureaus and it will assign a credit score to each individual.

What is CIBIL Score?

The most popular credit score in India is the CIBIL score. CIBIL Score is a 3 digit numeric summary of your credit history. The score is derived using the details found in the accounts and enquiries sections on your credit information report. The value ranges from 300 to 900 points. If you are having a high score, your loan application will be favourably considered by the lenders. This score is critical in the loan approval process.

Factors affecting your CIBIL score

If you want to improve your CIBIL score, first you must know the factors which affect your CIBIL score.

  1. Missed payments and delay in payments: This is the primary reason for a low CIBIL score. If you have missed the due date for your loan EMI or credit card bill, the lender will report it to CIBIL and your score will be affected. If you miss the due date couple of times, the rating can be affected very badly. The best way is to make all loan repayments before the due dates. But don’t worry. You can improve the score by making the payments promptly for the next 12-24 months.
  2. Holding large number of credit cards and many loans: I have seen many people keeping 6-8 credit cards in their wallet as a status symbol. But be ready to pay for it. The lenders will brand you as credit hungry and it will reduce your credit worthiness. Better keep 2 credit cards with a reasonable credit limit.
  3. Availing high credit limit every month: If your credit card limit is 60,000 and if you are utilising around 50,000 – 55,000 every month you will be branded as more credit dependent. Though you are making the bill payments promptly, this can affect your credit score. It is better to limit your utilization to 40 – 50% of your credit limit.
  4. Duration of good credit history: If you have a loan and if you are repaying it promptly for the last 5 years, your score can be better than a person who has a good credit history of only 1 year. Building good credit history can help you in improving your CIBIL score. If you don’t have a credit card, apply for one and settle the amount in full every month and it can improve your CIBIL score. But if you default on dues or pay only the minimum amount due in the card, it can spoil your CIBIL score.
  5. Too many credit enquiries: If you have a habit of applying for many credit cards and loans, it can affect your CIBIL score. Though you are not availing all these loans, just applying itself can spoil your CIBIL score. All such enquiries are reported to CIBIL and will affect your CIBIL score. If you are planning for any loan, compare the best option in the market and apply to only one lender who is offering the best terms. This can help in improving your CIBIL score.
  6. Default on dues or opting for settlement option: If you are not paying your dues, the bank may write off the amount after repeated efforts for recovery.  This will be reported to the CIBIL as write off. You can negotiate with the bank and if the bank agreed to settle the dues with a lower amount than the actual due, then it will be reported to CIBIL as settled. In the cases, your CIBIL score will be affected badly and it may take around 7 years for the score to improve.
  7. Types of loans availed: If you are having more unsecured loans like personal loan in your portfolio, it can affect your credit score adversely. But if you have a healthy mix of secured loan like home loan and auto loan, it will be viewed positively by the credit bureaus. So ensure that your loan portfolio is not high on unsecured loans.
  8. Being a guarantor without knowing its outcome: You are also liable in case he default on repayment of his loan! It can create problem for you and you may be forced to repay, if he is not repaying it. What is more, it can spoil your credit score. So think twice before agreeing to be a guarantor to your friend for his loan next time.

All these factors are important but they have different importance levels in deciding your CIBIL score. What you can do is to concentrate on each of these and work on it so that your score will improve in the next 12 – 24 months. Going for a credit card can help you, but opting for multiple cards and paying only the minimum amount due will affect your score. There can be differential pricing for loans in future in India, which will help you in getting a loan at a lesser rate of interest if your CIBIL score is high. So, try to maintain a high score. It pays.

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