Learn about Credit Score and Loan Basics

While applying for a loan, the Credit Information Bureau (India) Limited - (CIBIL) score is scrutinised by the bank in order to make a credit report. Anyone who wants a personal loan has to comprehend what CIBIL score is for the loan. This determines the eligibility, rate of interest as well as the loan amount. Different types of loans are applied for by organisations and individuals. You have to be familiar with all the details to understand what a loan process involves and how payments are made. CIBIL can be termed as a data provider to banks and financial institutions and is a database of credit information.

How does CIBIL score work?

A CIBIL score comprises a three-digit numeric summary that analyses the records of all your previous loans and payments.

• In order to know how CIBIL score works, the Credit Information Bureau India Limited or CIBIL takes into consideration an individual’s credit information on the basis of which a credit score is later assigned to him or her.  

• The creditworthiness of an individual ranges on a scale of 300 to 900. 

• An individual with a maximum CIBIL score of 900 can secure a loan at favourable terms. The higher the score the better the chances of procuring a loan with ease. 

• A large majority of Lenders consider a score of 750 as a favourable score that makes an individual eligible for a loan. 

Also Read: What differentiates your credit score from the CIBIL credit rank?

CIBIL score for individuals with no prior history of loans

All credit policies come with a limitation on the amount that is loaned. Most Lenders refrain from granting loans to individuals who have a NA or NH score. 

• A NA score in CIBIL indicates that the individual has never availed of a loan earlier.
• A NH in CIBIL score indicates that the individual has no track record of any credit or default payments. 

What is the meaning of a Credit Report Check?

When you apply for a loan, all the details are forwarded to the credit bureau named Equifax. This bureau is able to access the entire credit activity of borrowers. Based on that it generates appropriate credit scores as well as credit reports. These reports give borrowers an idea about their current credit status. It actually lists out the date on which borrowers have availed of the loans, the exact amount, their revenue balances as well as their entire payment activity. Even if you have paid debts in the past, the various details like the time you took to make the payments, are all reflected in your credit history. This impacts the credit score and credit availability. Any individual shouldn’t worry if checking CIBIL scores will reduce points, and keep troubles at bay. 

CIBIL score Range and what it signifies

How you can access your CIBIL credit score: 

You can access the official portal of CIBIL for free or by selecting a subscription plan to understand your credit score. 

• An individual initially has to visit the official portal of CIBIL and click on ‘Get Your CIBIL Score’. The next page that will appear, comprises subscription options and a free option. 
• You have to create an account by furnishing all your relevant details like email ID, username, password, ID proof (Voter ID, PAN card, Aadhaar etc.), date of birth, pin code, and phone number. Click on ‘Accept and Continue’. 
• The entire process involves a verification of identity which is done via a one-time password sent to the borrower’s mobile number.
• In the next step, an individual can confirm his/her enrollment in a new window. The individual gets an email for confirmation and later to check credit score, ‘Go to Dashboard’ needs to be clicked. 
• The individual needs to visit myscore.cibil.com. In the site, the individual can view their free CIBIL score and CIBIL report similar to other subscribers. 

Reading and Interpretation of a CIBIL Report

It is important to understand the six sections below to understand the details of a  CIBIL credit report. 

• CIBIL score – A credit score of above 765 or where the individual is considered a good borrower is considered favourably by CIBIL. Myths related to CIBIL score of Not Available or No History can be ignored.  
• Personal Information – Name, birth date, permanent account number, driving licence number etc. are some personal details that are collected by CIBIL as proof of accuracy and genuineness. The data collected from previous loan lenders are marked with an ‘e’ to prove its accuracy. 
• Contact Information – An individual’s telephone number, address, mobile number and email ID appear in it as reported by lenders. The genuine identity of an individual can be known by this proof. 
• Employment Information – In this section, an individual’s record and data of all the jobs and companies he/she has worked on is available. A check takes place of records in the companies and how frequently they have switched jobs.  
• Account Information – One of the paramount sections of a credit report that includes particulars of an individual’s all previous and ongoing loans and credit cards. An individual can make out how frequently he makes repayments and if he or she has missed any dates.  
• Enquiry Information – The recent enquiries made by lenders corresponding to the credit applications made is included in this section. Size of the loan, date of application, type of loan applied for, and lender’s name forms a part of it. 

The various types of loans you can avail of with a good CIBIL score

The loans based on the security provided are as follows

• Secured Loans – In these types of loans, a borrower pledges an asset against the loan such as property, equity etc. Comparatively, such loans have lower interest rates than unsecured loans.   
• Unsecured Loans – Such loans do not involve any pledges of a borrower and faster processing since there is no valuation of collateral. The interest rate is higher with no way to recover the loan if the borrower defaults. 

The loans based on a specific purpose are as follows

• Education Loan – A finance instrument such as an education loan helps a borrower to pursue higher education. A good academic record enables a borrower to get finance for domestic or international courses. 
• Personal Loan – It is provided based on an individual’s credit history and income. A borrower can opt for a personal loan to repay an old debt, down payment of a car, medical emergency among others.
• Vehicle Loan – These loans are offered by lenders for two-wheelers, commercial vehicles, used cars and new cars. The interest rates are fixed for vehicle loans.  
• Home Loan – For purchasing a house, this is a loan borrowed from a bank or financial institution. The rate of interest is adjustable or fixed and is dependent on the payment terms.

Loans based on Pledged Assets are as follows

• Gold Loan – It is a loan sanctioned by a lender in lieu of gold ornaments which is generally a certain percentage of the gold’s value. Private, nationalised banks along with NBFCs offer gold loans at affordable interest rates.  
• Loan Against Assets – A less risky loan that is secured by an asset where individuals and businesses pledge property, mutual funds, bonds etc. Lenders use the loan-to-value ratio and the rate of interest is lower. 

The different factors that affect a CIBIL score 

CIBIL score is dependent on a range of factors namely: 

• Payment History 

A negative impact is associated with recent delayed payments than earlier ones. The weightage of the repayment track record is 30%. A reduction of 100 CIBIL points takes place during a delay in payment of 30 days. 

• Credit Exposure 

The amount at risk during the life of the financial instrument is credit exposure. If utilisation is lower, the CIBIL score will be higher. Weightage corresponding to it is 25%.

• Duration and Borrowing Classification 

A good credit score eases the process of loan approvals and also attracts lower rates of interest. A secured loan together with higher loan duration results in a good CIBIL score. Weightage corresponding to it is 25%.  

• Period of Borrowing 

This is calculated from the date of sanction of the first loan of a borrower. If the time frame is higher, the credit score becomes better. The corresponding weightage for this is 20%.  

• Other Factors

If the monthly loan repayment is equivalent to 50% of earnings or a monthly income of the borrower, the credit score remains healthy. 

How can you improve your CIBIL score?

• Always prioritise the payment of your loans. This gives you a clean history of credit payment.
• A credit utilisation ratio of 40% always needs to be maintained and later while deciding for a loan, bid for a high credit limit during approval.
• It is recommended to keep various loans in your portfolio. These could range from education, home as well as SME business loans. Regular monitoring of credit scores helps to know the real-time status of creditworthiness. 

Causes of Low CIBIL score

Banks and financial institutions that provide loans consider a score below 750 as a low CIBIL score. 

• Payment of a small part of an individual’s total dues is never recommended. It may turn out to be a vicious circle of debt. This is reflected as poor repayment behaviour. 
• Attention should be paid if a credit card application or loan is not approved. It becomes significant to improve CIBIL score to reapply for credit later. 
• Reduction in the CIBIL score will take place unknowingly if an error appears in CIBIL report. The score needs to be regularly monitored and discrepancies should be reported. 
• High credit utilisation should not be maintained and if it is above 60%, it will result in a decrease of the CIBIL score. Individuals always prefer a higher credit limit than the sanctioned amount. Individuals receive benefits such as extra borrowing without further processing costs and it also increases the credit score. 
• If the amount borrowed is low and it has no penalty for late payment, this has the tendency for a creation of a mindset for delayed payment. A fall in the CIBIL score takes place regardless of the amount of delayed repayment. 
• Individuals should go for a proper mix of loans. An individual can try a mixture of an educational, home, or car loan instead of only a personal loan. 
• Very often, individuals who already own credit cards are approached by representatives of different money-lending institutes with attractive offers on new credit cards being promoted by those institutes. However, this leads to a loss in the rich credit history involved with the old credit card. Even if an individual decides to take new credit card, the old ones should be utilised for a longer time as they are a proof of the credit history. 

Also Read: Loan Rejection and Credit Score

How is CIBIL score calculated?

CIBIL score is calculated on the following premise:

• Repayment History: The repayment of credit in the past makes up 35% of an individual’s CIBIL credit score. Missing EMI payments and defaulting on repayment of credit can have a disastrous impact on the score.    
• Timeframe of repayment: A credit score is formed after a type of credit is availed. It is noteworthy that completely avoiding use of credit does not help either. Importance has to be given to the creation of a positive 10% score and hence a balance of credit must be maintained. As a result, an individual can decide on secured and unsecured loans. Repayment duration adds another 15% to a CIBIL score.
• Credit Utilisation and Existing Debt: A CIBIL credit score of 30% occurs because of existing debt amounts that are reflected in the credit report. It’s based on the credit amount sanctioned and how much the amount was utilised. A negative credit score appears when too much credit is used as compared to income or reaching a credit card’s limit each month. 
• Unsuccessful Credit Enquiries: Each time an individual applies for credit, it is reflected in the CIBIL report. Many loan enquiries can have an adverse impact on a CIBIL credit score. CIBIL makes out about an individual as credit-hungry and someone who is unable to survive within his means. Rejection is visible in the score as well. In such a case, the lender considers the individual as financially incapable. Therefore, an individual should be certain that he/she meets eligibility criteria with a sure opportunity of getting approval. 

Conclusion: 

All individuals and businesses need to give attention to their respective CIBIL scores to understand whether their loan applications will be approved or not. We are sure the above details have helped you understand the advantages of maintaining a good credit score. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.