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Decoding a ‘bad’ CIBIL score

28-jan-2016 written by : FSI-Team

Credit plays a very crucial role when it comes to a person’s life – any purchase that you choose to make, be it a house or a car, can be bought on credit today. Of course, while having your dreams fulfilled is one thing, to get a loan to manage the same is not always possible. While there may be several lenders in the market, your personal credit history plays a significant role in determining whether the credit you require will be extended to you or not.

What is a credit score?

A three-digit numeric indicator of a person’s creditworthiness, a score tells a lender whether giving a loan or approving a credit card will be worth the risk. Typically between 300 and 900, a higher score means that the chances of the credit being given at the most competitive rates are highly likely. Of course, the score is merely indicative; the decision of whether to lend or not is ultimately taken by the lender based on several parameters. What may be a low score for one may not be so for another, as each lender has a different risk appetite.

The score conveys the borrower’s intention as well as ability to repay the loan.

What are the factors that determine CIBIL score?

To determine whether a CIBIL score is good or bad, a host of parameters are taken into account. These include:

Repayment history: One of the more critical parameters, this measures the consumer’s repayment capacity and intention. One needs to ensure that bills are paid in a timely manner and without any delay to avoid a negative score.

Time period spent servicing debt: Here, the longer you have ‘good’ credit on your record, the better it is to boost your score. This indicates that the consumer is able to handle credit responsibly, even over a long time frame.

Amount owed to lenders: The outstanding amount (either by way of a loan EMI or credit card payment) is taken into consideration, which is essentially a way to determine how solvent a consumer is. The closer you are to maxing out your credit card, for example, may indicate concerns with financial stability, and a lender may determine that extending further credit to this customer may be risky. Hence, do try and maintain a credit utilisation ratio of 30 percent (or lower) of the credit limit assigned to you.

New accounts applied for: Every time you apply for a loan or credit card (that is any new account), your credit report gets ‘hit’ to run a check on your credit health and overall financial behaviour. Too many such hits indicate to a lender that the consumer in question is likely to be credit hungry, and hence your chances of an application (made when you really need a loan or card) may just be denied.

Credit mix: Lenders also look out for the type of mix you have between your accounts – secured (products such as home or auto loans) and unsecured (personal loans or credit cards, for example) products. Using just one type of credit does not go down too favourably with a lender, and can have a negative impact on your credit score. Instead, try to maintain a healthy credit mix – but it goes without saying that payments need to be made on or before the due date on all the accounts you hold.

How will a ‘bad’ or poor score impact me?

Simply put, a poor CIBIL score can have an adverse impact on your financial life, as lenders are reluctant to extend credit facilities to customers who may not be willing to repay, or not have the means to repay.

Of course, a CIBIL score is not the only parameter taken into account, and a lender may consider approving a loan for low CIBIL score. However, these loans may be at a higher rate of interest or for a lower amount. Hence, while a loan for a low CIBIL score may not be impossible, keep in mind that it may not also be the most competitive.

Hence, to be sure that you don’t take a hit on your credit health, make sure that your credit report (and score) are consistently good.

How do I improve my CIBIL score?

Now that you know what all goes into a ‘bad’ score, do not fret! Rest assured that there are ways to improve cibil score over a period of time with a certain amount of financial discipline.

The first step would be to call for a copy of your credit report. At a nominal fee, this can be purchased from any of the four credit bureaus, or credit information companies operating in India today.

If your score is low, do speak with a credit counsellor at a credit health management company. With trained personnel to help, you can work towards rebuilding your credit and eventually enhancing it as well.


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