Role of the CIBIL Score in the Loan Application Process

With your CIBIL Score online availability, you can now manage your loan requirements in a more organized way, whether it’s for a home loan, credit card, auto loan or personal loan.

While CIBIL plays such a significant role in people’s lives in terms of meeting their financial demands, keeping track of their credit scores and reports is simple. You can check CIBIL Score Online and obtain your Free CIBIL Report.

What is CIBIL and Its Function?

CIBIL is an institution that records, documents, and reviews any individual’s credit score and debt details who have borrowed in the past. Consumers today rely on loans and credit cards to support them to pursue their dreams and financial needs. A CIBIL Score is a three-digit number representing an individual’s credit score, a summary of their credit history, and a reflection of their credit profile which can be obtained from CIBIL score online portals.

Banks, home finance firms, organizations that offer credit cards, financial institutions, and NBFCs are all members of CIBIL.

Every one of these member companies and organizations shares all the information about all the people who have loaned from (or through) them. They keep a massive database of borrowers with credit ratings to check through free CIBIL report requests.

The CIBIL score varies from 300 to 900 points. The Score is calculated using the CIBIL Report’s information,  which includes credit cards and loans, overdue amounts, and days past due. The credit bureau makes no loan decisions bureau. It only gives data to the bank and financial entities, who use it to screen loan and credit card applications.

The importance of CIBIL evaluations and ratings in your financial path should not be underestimated. They decide whether you qualify for a loan or a credit card.

Why does the CIBIL Scores Affect your Loan Application?

When lenders evaluate your loan request, one of the first things they look at is your CIBIL scores online. Interest rates, loan amounts, and loan terms are all determined by various factors related to your income and stability.

Based on your CIBIL  score, lenders make this decision for you. However, they will only do so after determining that you are not a high-risk candidate who will escape with credit or default on payments after checking the free CIBIL report. These details are provided by credit information bureaus (CIBIL).

An individual’s past conduct is used to predict his or her future conduct, and the CIBIL Score demonstrates a consumer’s financial status. CIBIL is one of India’s most well-known, recognized credit bureaus. CIBIL is linked to a variety of banks and financial institutions. The purpose of CIBIL is to protect lenders.

What Impact does CIBIL Have on Your Loan Application?

Your credit score evaluates your credibility and helps lenders in determining if you are eligible for a loan. The CIBIL rating is based on a credit record of 36 months which is available online with free CIBIL reports. Credit mix of secured loans, unsecured loans, credit usage, and payment history are the four main elements influencing a consumer’s CIBIL Score.

Your credit score must be at least 750 to be considered for a loan. The higher it is, the more likely you are to be granted a loan with a lower interest rate and favourable deals.

You will be surprised to learn that not having a credit history affects your credit score negatively. In addition, it may be challenging for the lender to identify whether you are a serious risk or relatively safe borrower when you have never owned a credit card or borrowed a loan before. 

For a better understanding, see the table below that determines loan eligibility.

Borrower 1

Borrower 2

Factors Affecting CIBIL Credit Score

Let’s take a look at some of the factors that influence your CIBIL score:

Failure to Make Payments

Late payments and your credit score are closely connected. This is the key component that has a negative impact on your score. Failing to pay equivalent monthly instalments (EMIs) on time or missing a credit card bill due date will have a negative influence on your credit record. A single 1-month late payment will not have a long-term negative impact on your credit score. Repayment conduct, positive or negative, is reported to CIBIL, which is noted in the report and reflected in your score. If you have a low credit score as a result of not making payments on time, it will take at least 6 to 8 months for your credit history to improve once you’ve made it a habit. You can find out your CIBIL score online and get a free CIBIL report when you need one.

High Credit Utilisation Ratio

The credit utilisation rate (CUR) indicates how much credit has been used out of your credit limit. Lenders favour loan applicants who have a credit utilisation ratio of less than 40% of their overall credit limit.  For example, if your credit card limit is Rs.50,000 and, you’ve only used Rs.20,000, your credit utilisation ratio is 40%. A high CUR indicates that the consumer is only prepared to make the minimum payment due, which impacts CIBIL scores drastically.

Having too Many Loans

Too many loans might hurt your credit score because it’s typically seen as an indication of poor financial management, regardless of whether you were able to repay them or not because they consider you to be credit thirsty. Even if your credit history is spotless, you will be viewed as a high-risk candidate who could default at any time.

Credit History Length

The length of time you’ve had credit is also a significant component that accounts for 15% of your credit rating. The better your credit score, the longer your credit history is. The lack of a credit history works against you since lenders doubt your ability to make payments.

EMI-to-Income Ratio

It’s computed by dividing your monthly dues by your monthly income. According to the general rule, the maximum EMI-to-income ratio is 50 percent, as lenders believe you’ll require half your earnings for living expenditures. Banks will refuse to provide you with another loan since you are over-leveraged, and if your EMI-to-income ratio is unfavourable, you won’t be able to put more money toward paying off your new loan.

Negative Comments in CIBIL Report

Every lender leaves their borrower’s feedback and remarks. When you are unable to pay a loan or credit card bill, and the bank offers you the option of refinancing your loan at a reduced interest rate or waiving a portion of your outstanding credit loan, this is recorded on your credit report and has a negative influence on your credit score. In addition, banks will decline your loan request if there are any mentions of debts being “settled” or “written off.

Matching Defaulter List

Utilise your free CIBIL report availability regularly across the year because it may contain inaccuracies such as missing payments or misspelt names, which can harm your credit score. If you find an inaccuracy, you can rectify it online by logging onto the credit bureau’s website or submitting a completed dispute resolution form to the agency. As a result, you will be demonstrating responsible credit conduct.

Before you Apply for a Loan, Get to Know Your Credit Report

As earlier stated in this article, your credit score determines your financial capabilities; as a result, if you have a poor credit score, a bank may reject your loan request or charge you a higher interest rate. Get your CIBIL score online check done at least two months before you want to apply for a loan, and double-check it to see what has affected your credit score. Based on the factors that have impacted your credit rating, it may take a month or more to restore your credit.

Similar Defaulter Lists

Individuals who have defaulted on their payments are listed by name, current occupation, address, age, and other characteristics on databases kept by financial organisations and banks. If any of the information you provided matches with that of a defaulter, you will be rejected a loan before the bank even analyses your CIBIL score.

Yes, you are not at fault, but we have seen incidents like this in the past that have caused problems, limiting their chances of getting a loan. In these situations, you can contact the bank and work out a solution. However, it may cause the loan process to be delayed.

Avoid Increasing your Credit Limit Often

While having a higher credit limit on your credit card assists you to manage your day-to-day spending and gives you financial stability, this can have a negative impact on your credit score. It tells lenders your credit-hungry, and you might not be able to keep up with your EMI payments and end up defaulting. Before approving a loan, lenders strive to determine an individual’s net worth (assets – obligations).

An increase in credit card limits regularly could be interpreted as an indication of being totally dependent on credit to manage the day to day expenses, which would raise a red signal for a lender and affect your loan application.

How do I Improve my CIBIL Score?

It isn’t the end of the world if your CIBIL score is poor. You can enhance your credit score by taking the appropriate steps. Maintaining a healthy credit score necessitates disciplined credit management. If you’re having trouble maintaining your CIBIL score, check over the suggestions below to assist you in improving it.

1. Don’t miss your payments. It is critical to pay EMIs on time. CIBIL or any credit scorer considers this one of the essential factors when determining your credit score. Make a note of all of your monthly bills and make sure they’re paid on time. Even if it is a genuine lapse, missing payments have a negative impact on your CIBIL rating. Payments should be made on or before the due date. If you’re paying by check, make sure you write it in well advance of the due date to allow for the clearance period.
2. Close any long-term loans that have a negative impact on your credit. Your credit score will suffer if you have many liabilities on your credit record.
3. Do not remove old debt from your report. Keeping old debts on your credit report is a good idea. We’re usually on the phone as soon as the home or vehicle EMIs are paid off, seeking to get it erased from their credit report. A positive debt should be kept on your credit report because it will make future credit requests easier.
4. Considering applying for a personal loan, and a home loan, credit card all in the span of a few months is not advisable. Your credit score can suffer if you make too many credit inquiries in a short period of time. It affects your creditworthiness, which lowers your credit score. Preventing new credit applications within a short interval is one approach to avoid a drop in your score.
5. If you apply for a shared loan with someone who has missed payments in the past, this information will appear on your CIBIL record, lowering your credit score. Hence, keep a close eye on the credit behaviours of your join account users, as you may end up suffering the consequences for no fault of your own.

Once you are on track, keep checking your CIBIL score online and take a free CIBIL report to read every detail carefully.

Conclusion

While a low credit score can have a negative impact on your future funding needs, the situation is not hopeless. You can develop several habits in your life to help you increase your CIBIL scores and live a better life, but it’s crucial to remember the dos and don’ts listed above. A strong CIBIL score implies that people are responsible with their money and pay their bills on time. As a result, banks, lending institutions will provide you with a greater loan amount and better terms.

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