CIBIL Scores: The Key to a Hidden Fortune

02-Feb-2016 written by : FSI-Team

Did you know that being credit healthy is not just the key to getting a loan or credit card when you most require one, but that it also helps you save money over a period of time? If you’re planning to make an application for a home loan, let’s get you started with a few essential facts that will bring your credit score into perspective.

Firstly, what is a credit score?

A three-digit indictor of your creditworthiness, it is the go-to piece of information for a lender when you apply for a loan or credit card. Typically rated between 300 and 900, a higher score signifies that the customer in question is likely to be more reliable and can use credit responsibly. Of course, the score is ultimately a guideline – there are other factors too that determine whether a loan application will be approved or not.

Globally, financial institutions use the risk based pricing model, by which the rate of interest for a loan or credit card is determined prior to credit approval. Naturally, with a higher or ‘better’ score, the chances of an application going through also increase. In India though this model is not practiced as on date, and it is credit scores that are slowly gaining acceptance and being used.

What then is a CIBIL score?

There are four credit bureaus (that generate credit reports and scores) in India, namely CIBIL, Equifax, Experian and CRIF High Mark. While Equifax follows a close second, it is CIBIL that is the oldest bureau in the country, and hence a credit score is sometimes called a CIBIL score.

Of course, while each bureau offers credit scores, there may be minor differences between each bureau’s score, but the logic used to derive the same is similar.

Hence, if you wish to request for a copy of your report, of take a look at your score, you can avail of the same from any or all of the bureaus.

What happens if the score is low?

Fret not, as it is possible to get a loan with a low credit score. As mentioned, a credit score is one of the parameters that a lender takes into account prior to approving a loan. While a low score therefore may not mean absolute denial of the loan, it is possible that the terms and conditions that it is approved at, may be less than ideal.

Let us take an example. Ramesh wants to purchase a new house and applies for a loan of Rs. 1.5 crore with a leading housing finance company. At the same time, Ritesh also applies for the same amount, with the same company. Ramesh has a lower credit score as compared to Ritesh, and this is where the difference comes in. With a rate of interest of 9.75%, Ritesh will need to pay an EMI of about Rs. 1.42 lakhs per month, while Ramesh’s outgoing will be in the range of Rs. 1.65 lakhs per month, for a 20-year loan tenure. This difference is owing to the credit score, and the lender being happy to extend credit at a lower rate to Ritesh as a result. Consequently, over the tenure of the loan, Ritesh will wind up saving a significant amount of money by way of interest costs.

Let us take a case wherein Ajit wants to expand his business. To achieve this, he approaches a bank for a business loan, but is denied the same on account of a low credit score. This is an example of a loss of opportunity: had Ajit been given the loan at the time he required it, for the amount he needed, he would have been able to expand his business significantly. Over a period of time, his business having increased would yield more profit. Hence, the lack of a ‘good’ or healthy credit score set Ajit back by a few years, until he could focus on expanding his business again.

Credit card issuers too are hesitant to offer a card to a person with a low score, as the likelihood of a payment default is higher in this case. A person with a low score is also perceived to be one who likely uses credit as a crutch to manage even everyday expenses.

How to boost your credit score

The first thing to do would be to request for a copy of your credit report and go through it in detail. Check that the information contained therein is accurate and pertains to your loan and card accounts.

If your score is low, consider speaking with a credit counsellor from a reputed credit health management company such as Credit Sudhaar. Over a period of time you will know how to boost your credit score, and even continue to maintain the same.

Remember that while a low score is not the end of your financial journey, and you can get a loan with a low credit score, it is always better to have a good score to avail of the most competitive options open to you. Hence not only will you get a loan when you most require it, but also save money in the long run.



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