A CIBIL score is one of the pre-requisites that most of the lenders ask before offering a loan. A CIBIL score is also known as a credit score. This score lies between 300 and 900 and implies the creditworthiness of the borrower.
What is a CIBIL Score?
A CIBIL score represents all the financial transactions of an individual where he has borrowed or repaid the loan. It contains the details of the loans availed or applied, credit card, and bank account of an individual. And so, it reflects the creditworthiness of the borrower.
The minimum CIBIL score for a business loan, home loan, car loan, or any other type of loan is 750. Anything above this is said to the best score for a loan. A high CIBIL score shows:
- How responsible the borrower is?
- If the borrower is risky to lend money?
- Has he paid all his previous debts and loans on time?
Thus, a CIBIL score gives an insight into the borrower’s behavior with finances and directly impacts his loan taking ability. Also, a CIBIL score affects interest rate as well. Low CIBIL score means high risk and thus, high interest rates as well. Whereas high score means low risk and the interest rates for loan are also low.
Why Lenders Check CIBIL Score?
As conveyed earlier, a CIBIL score represents the creditworthiness of the loan seeker. It allows the lender to judge his potential to repay the loan and determine if he is eligible for a loan or not.
The other reasons why lenders check credit score include:
- To check the loan seeker’s credit history.
- If the borrower qualifies for loan or not.
- To measure the risk of granting a loan to the borrower.
- To determine the interest rate and loan amount.
What a CIBIL Report Contains?
A CIBIL report contains the following details:
- Credit: The credit history is an important component of the CIBIL report. This includes the currently and previously availed loans. All this information is mentioned under different sections, such as credit cards, loan installment, etc.
- Account History: This section of the CIBIL report contains the credit account details of the borrower. The information such as the borrower’s name, account number and its opening date, and the current balance is mentioned in this section.
- Credit Enquiries: This section includes the number of times the third party has accessed or enquired the borrower’s credit report in the previous 2 years. Significantly, a third party checks the credit report only when you have applied for a loan. So, the number of times an inquiry is made directly represents the number of times you have applied for a loan. And if you have applied for a loan multiple times, it showcases your credit hungry behavior and therefore, have a negative effect on the report. Notably, the lenders have access to only this section of the report.
- Records: This section contains the borrower’s financial mistake and can be termed as the most important part of the report. The number of times the borrower has default the payment of the EMI or his cheque is bounced, all this information is mentioned in this section. The information regarding the criminal arrests and bankruptcies is also mentioned here.
5 Factors That Affect the CIBIL Score
After knowing the importance of CIBIL score to avail a Business loan and the reasons why lenders give it so much importance, now let’s read the ways by which you can improve your CIBIL score. Notably, a high CIBIL score would not only help you get a loan application approved in one go but also get the loan at the low interest rates.
With the help of the following steps, you can work towards improving the CIBIL score:
- A Check on CIBIL Report: There are times when the CIBIL enters some wrong information in the CIBIL report. You need to keep a check on the CIBIL report and check whether any wrong information is entered or not. You can check the report once a month or two. In case there is any wrong information entered, get it corrected.
- Credit Hungry Behaviour: If you are always in debts and apply for multiple loans, this shows your credit hungry behavior. This reveals that you live on credit and are habitual of taking credit. It is imperative to hide this and suggested that do not apply for more than 2 loans at a time. Credit hungry behavior of the borrower is a big no for the lenders.
- Pay Dues on Time: Paying all dues on time is the guaranteed step for improved CIBIL score. You need to make payments of all the bills, loan EMIs, etc. at least 5 days before the due date. This represents your responsible behavior with the bills and dues.
- Credit Utilization Ratio: Never use the credit card to its entire limit. It is important to maintain 30-40% credit utilization ratio. Using the entire limit shows credit hungry behavior and as discussed in the above point, this is a big no for lenders and also brings the credit score down.
- Applying for Loans Frequently: The number of times your credit score is checked by the third party depicts the number of times you have applied for a loan. The number of times you have applied for loans represents your credit hungry behavior. This can significantly bring your CIBIL score down. It is imperative to apply for another loan after rejection from one lender in a time span of at least three months.
If you want to get the loan application approved in the first go, it is essential to have a high CIBIL score. And now that you know everything about the CIBIL, you can work towards having a high CIBIL score.
Also, in order to stop the loan application from being rejected, you must check the eligibility requirements of the lender and determine if you meet them or not. It only makes sense to apply for a loan from a lender if you meet his eligibility criteria. You can either work towards meeting the eligibility requirements or search for a new lender for a loan.