In a world where things are constantly changing, having easy access to credit can help you get out of a bind. However, access to credit is sometimes contingent on one’s ability to repay the money owed by him/her. Today, easy access to credit plays a big role in enabling financial freedom and a key lever to help you with your credit requirements is your CIBIL score. Your CIBIL score is an important factor that lenders look at while evaluating a loan application. Lenders and banks are cautious when it comes to approving credit card applications and different types of loans. Hence, it’s important to understand how the score is calculated and the factors that impact your CIBIL score.
CIBIL score is a three-digit numeric summary of a borrower’s credit history. The score is derived using the credit history found in the CIBIL Report and takes into account, the borrowers’ credit profile over the last 36 months, i.e. all kinds of loans, such as home loans, credit cards, personal loans, automobile loans, overdraft facilities etc. that one has availed and the payment history on these.
There are four key factors that impact your CIBIL score:
- Payment history: Paying your loan EMIs and credit card bills on time by the due date is most important for maintaining a good credit history and high CIBIL Score. A single missed payment can reduce your credit score and thereby decrease your credit worthiness.
- Credit mix: Having the right mix of secured and unsecured loans is also important. It is better to have a healthy mix of secured (such as home loan, auto loan) and unsecured loans (such as personal loan, credit cards).
- Multiple enquiries: Too many loan enquiries may have a negative impact on your score as it indicates that your loan burden may go up in the future.
- High credit utilisation: A high credit utilisation limit indicates a rising debt burden over time and may negatively impact your score. It is advised to keep the utilization under 30% of the overall credit limit for your credit card.
It is instrumental to showcase your credit-consciousness by building and maintaining a high CIBIL Score. If you are keen to avail credit opportunities, remember that your access to credit depends on your established credit profile and CIBIL Score. Apart from the fact that your loan is sanctioned without any hindrance, a good CIBIL score ensures that you get better interest rates. Different banks have different loan criterias, but banks offer good interest rates to people with higher CIBIL score. In their pursuit for credit-conscious consumers, lenders are increasingly rewarding consumers with a positive credit profile and high CIBIL Score. Here’s how you can take advantage of maintaining a good credit history:
- Faster loan approvals: a positive past repayment behavior is a good indicator of your credit-worthiness. The higher your CIBIL Score, the more credit-worthy you are and this is exactly what lenders are looking for. It helps lenders make quicker credit decisions so that you can get faster loan approvals.
- Competitive rates of interest and reduced processing charges: if you have a good CIBIL score, there are chances that you would be offered loans at competitive rates of interest or reduced processing charges. The reduction in the rates of interest across large-ticket loans will also help you in significant savings. Thus, a credit-wise behavior will help you strive to build and maintain a high CIBIL Score to use it to your advantage.
- Pre-approved loans: Lenders are forthcoming about their loan offers and eligibility criteria, now offering consumers a variety of pre-approved loans based on their CIBIL Scores.
- Advantage in negotiations: When evaluating loan offers, a high CIBIL Score can give you an advantage in negotiating lower rates of interest, the loan tenure and other additional charges.
- Longer loan tenures: A higher score allows you to ask for loans with a longer tenure. A longer tenure can reduce your credit burden as loan repayments across a longer period of time also translates into smaller EMIs and lesser monthly credit burden.
- Additional credit card benefits: Before approving a credit card application, lenders look at your EMI to income ratio to gauge your repayment capability and check your credit profile by reviewing your CIBIL Score and Report. A high CIBIL Score reiterates good credit behavior and will help them take key underwriting decisions such as setting a higher credit limit on your credit card, or offering reward programs like cashbacks. A high Score has a dual advantage of ensuring you have plastic money when you need it the most as well as delivering benefits (even cash-saving ones).
Hence, staying focused on your credit behavior and showcasing good credit habits will help you access credit when you need it the most. Not only will this help you get access to credit, but may also help you get rewarded for your credit-conscious behavior by the lenders.
Sujata Ahlawat, Senior Vice President and Head of Direct to Consumer (DTC) Division, TransUnion CIBIL