Those who are very keen for a loan will definitely would have come across the word “CIBIL”. Yes, no bank or NBFCs out there will be ready to offer you loan amounts without checking your CIBIL score. In fact, whether to approve a loan, how much loan amount should be approved, what should be the tenure of the loan and the rate of interest at which the loan should be disbursed will be decided by the banks based on the CIBIL score. Having good CIBIL score is not an option; it is a necessity. Thus it is important to know what can cause a drop on the CIBIL score and how to improvise it through everyday activities.
Firstly, it is essential to know what is considered as good CIBIL score and what your rating is. There are many websites which will help you to check your CIBIL score for “Free”. Based on this information, you can decide whether you are eligible for a loan and what is your creditworthiness. This is what each CIBIL score rating signifies:
Rating 0 or -1: If the CIBIL score is 0 or less than 0 then it means that there is absolutely no credit history created through credit cards or loans. At this stage you should consider to take loans so that it will help you to create a credit history.
Rating 350 – 550: This rings an alarm as it is considered as a very bad score by banks and financial institutions. This means you are defaulting payments and the probabilities of getting new loans or even new credit cards are very minimal.
Rating 550 – 650: This is considered as an acceptable rating as it indicates that the individual is fairly regular with their payments on loans and credit cards and they can be trusted with any new loans and credit cards. There is high chance of the loan applications being approved without much hassle.
Rating 650 – 750: Individuals with this credit rating are doing well on their financial part of life. There will be no need to face any problems with regard to loans and also credit cards. You should stick to your current financial habits; you could reach the best CIBIL scores sooner.
Rating 750 – 900: This is considered as the best range to be in CIBIL score. This also means that you are a financial expert. An individual who is very regular with their credit payments will have a really good payment history and thus the credit scoring will also pick up. Banks will be very willing to offer credit products with such individuals.
Everyday things that bring down the CIBIL score:
CIBIL score is not something that can be changed from 150-750 in just a day. There should be constant effort put by the individual in order to increase the CIBIL score. Before finding how to increase the CIBIL score, it is necessary to understand what are the factors that will bring down the CIBIL score?
- History of making payments:
If you make all payments in a timely manner without any default, the CIBIL score will keep increasing consistently. Some individuals will try to pay only the minimal balance of the credit cards to avoid late payment charges but they do forget to understand the bigger effects on their CIBIL score. Anytime there is a need for loans, this will be an issue. So do not look for short term benefits instead be more concerned about such credentials that will come to assist during emergencies.
- Income-to-debt ratio:
Maintain a good income-debt ratio. If debt is more than income then it will affect the CIBIL score. Control your expenses and plan your income to be wisely spent. Keep aside some amount from your income towards savings for investments and some towards emergency funding. The rest can be used for managing debts and making payments for credit cards and loans.
- Being a guarantor:
Though it sounds to be a guarantor to someone’s loan, do not jump into such commitments unless you are 100% sure that the borrower will not default the payments. In case if the borrower defaults and gets to a state where he cannot repay the loan, guarantor will be held responsible to completely clear the debt on behalf of the borrower. Being a guarantor will affect the CIBIL score and banks will consider it as your liability even though you are not the actual borrower of loan amount.
- Credit card limit utilizations:
Banks are ready to offer high credit limits. But it is left to each individual to decide how much should be spent from these credit limits. In order to maintain high CIBIL scoring, do not use credit cards to the maximum limits. Using complete or high credit limit will drastically bring down the credit scoring (CIBIL). High credit card limit utilization in order words means that the individual has high repayment commitments. Thus banks will be not willing to lend loans and if at all they approve loans, the rate of interest on such loans will be high.
- Loan settlements:
This is a situation where the borrower gets into a situation where he/she will be unable to repay the loan to the bank due to joblessness, medical conditions, and loss of family member and so on. In case situation bank might agree for a loan settlement but this will affect the CIBIL score immensely and nearly for the next 7 years, the borrower will not be eligible to take any loans or credit cards. There will remarks stated in the CIBIL report based on which banks and NBFCs will reject the loan applications.
- Not using credit cards:
Not using credit cards will actually bring bad effects on the individual. Many are of the misconception that not using Credit cards is good. But the truth is, in the eyes of credit bureau, the individual will not have any credit history, thus they will be unable to judge the credit history of the user. Absence of transactions or lack of credit transaction will bring down the credit score to 0-100 points.
- Reducing credit cards:
Many think that reducing credit cards is a smart way to increase the credit score, but it will actual cause a reverse effect on the person’s CIBIL score. When a person cancels his/ her credit card, the effect on CIBIL score is – Credit limit will be reduced and credit utilization will be increased. So, if you wish you control your credit card expenses simply do less transactions rather than closing the credit card completely which will kill the credit balance.
- Ignoring Credit reports:
Keep monitoring your Credit report every now and then. In case if there are any miscalculations and errors, it can be rectified immediately instead of checking it and fixing at the time of needs and emergencies. Banks might misreport facts about the individual in error and this will affect the credit scoring. Thus checking this in regular intervals will help in avoiding such errors affecting the CIBIL score.
Effect of Loan Settlements
When banks notice that you are defaulting payments regular, they will throw an option called as “settlement”. Never take up such offers as it might sound good for the current situation but will ruin your CIBIL score completely and getting a loan in next 7 years will be nearly impossible. Impact is ability to access loan will be restricted as this individual will be classified under high-risky category.
Accounts that get considered and those that do not get considered for CIBIL Scoring
All banks account will be considered to the CIBIL scoring. Accounts are linked to CIBIL with the PAN Identification Number. Thus any income or expenditure associated to a particular PAN card number will be linked to a single CIBIL rating. The credit limit and usage of credit limit is calculated on the basis of this. And Credit Bureau will inform banks how reliable and credit worthy an individual is. Any account that is linked with your PAN Card will have direct link to CIBIL. Thus it is not easy to hide any credit or finance related information from the eyes of CIBIL easily.
Range of Past History that gets considered:
The CIBIL Score 2.0 is an updated and new version of Credit score which is designed keeping in mind the recent trends and changes in consumer profiles and credit data. Banks are slowly switching to this new version and people may find a difference in new version as compared to the earlier version. Upto 2-7 years of a past history range is considered by the CIBIL before deciding the score for each individual. Major actions such as loan settlements will bring down the credit score to bad rating and getting loan will not be possible upto 7 years.
How easily can the errors be rectified?
CIBIL do not delete or change details in the record reflect to the individuals. All information in CIBIL is based on what is shared by its members (banks and non-banking financial institutions). In case if there is any error in the CIBIL report, an individual will have to approach the bank through which incorrect information would have been sent and will have to get it rectified from the bank’s end. CIBIL has no direct touch on the credit score.
CIBIL Score Effect on Employment:
Though it might seem unlikely, there are some companies which will check the CIBIL scoring an on individual before hiring to check the reliability and credit-worthiness of the individual before issuing offer letter. This check is conducted as part of the individual’s background check. Companies consider good financial history as health management of finance in life as well as other attributes such as honesty, organization skills and reliability.
Risk of being a loan guarantor:
Being a guarantor for loan is not a simply thing. It is important to be fully aware of the risk being signing the agreement as a guarantor. Being a loan guarantor can affect you in two major aspects and this can toss your financial status if the borrower defaults payments or fails to repay the loan completely. Under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, banks have the right to attach the guarantor’s assets for the loan recovery.
Affects credit history:
The credit report will mention that you are a guarantor for a loan amount of ‘xxxx’ amount. Being a guarantor is equal to being a borrower. Bank will reduce the eligibility for loan for a person who has been reported as a guarantor for loan. If the borrower defaults by any chance then that information will also report in credit report and the guarantor will be held responsible for repaying the loan amount. Bank will recall the loan legally from the borrower’s name to the guarantor’s name and guarantor will then be solely responsible to repay the loan amount.
Affects future loan prospects:
By being a guarantor for loans be mindful that this will affect you from getting future loans. It is considered as good as you have an outstanding loan with the bank or NBFC. And until it is repaid to the fullest, the same will be reflecting in your CIBIL score. In case if you apply for another loan in future until this is not cleared, the creditworthiness reflect less due to outstanding guarantor loan.
Unless the loan is for your child or spouse, do not stand as a guarantor. It is advisable to avoid such huge financial liabilities and it will affect your potentiality for credits at the time of need. Family members and friends might try to convince you, but do not fall for their words. Be very firm in your decision and avoid being guarantor to friends and relatives. Once you sign as a guarantor for a loan, there is no way to withdraw from it. You cannot cancel the guarantor position from the loan even if you and borrower decide to. Some banks don’t allow changing guarantor as well in later stages.
