22-Nov-2016 written by : FSI-Team
A CIBIL score in today's times is virtually your ticket to good financial and credit health, hence it becomes very important to ensure that you always have a good score, one that will see you through when you want to avail of a fresh line of credit.
A CIBIL score is nothing but a credit score, one that is provided by CIBIL, India’s oldest credit bureau (the other three being Equifax, Experian and CRIF High Mark). It is a three-digit summary of your credit information report, which is a detailed account of your credit history. It takes into account your credit behaviour (both loans and credit cards), past and present.
Typically, a credit score ranges between 300 and 900, and a higher score is always considered to be good. With CIBIL for instance, a score of 750 and above is considered to be a good score, and most lenders are likely to look at your loan application favourably if you score is 750 or higher.
It’s very simple – a good score can make a world of a difference to your loan application. The first step is loan approval. When your score is low, there are lenders who are more apprehensive to lend, hence may just reject the application outright when it comes to the credit decision stage. This is because a higher score denotes better creditworthiness, and makes a bank or financial institution more comfortable or willing to extend credit to a person who seems to be more stable, and hence less likely to default on loan repayment or ensure that they pay their credit card dues in time.
When your loan comes at a better interest rate – significantly lower than it would be otherwise, on account of a higher credit score – it automatically brings down your cost. This is because you will pay less towards EMI repayment when it comes to the overall loan amount. In the long run, you would have paid less for the loan, and consequently for the product you have availed of itself, or a house you have purchased.
The other factor that comes into play is that you save money not only because of lower interest rates, but you also have no loss of opportunity. Let us assume that owing to a low score, you do not get the loan when you require it the most – this can result in a loss of opportunity since the product may not be available at a later date, or even if it is, it could likely be more expensive. For instance, property where the prices keep rising.
Globally, credit scores go beyond just financial services – they can determine whether you are likely to get a house or apartment on rent, as a potential landlord would want to ascertain that a tenant is not likely to default on paying up their rent in time. Similarly, telecom companies use a credit score to determine what credit limit they want to assign to a subscriber, as well as the deposit you would need to set down to avail of the connection to begin with. Employers too in many instances check the credit score before offering a job to a candidate, especially in cases where the job in question requires the employee to maintain a certain level of confidentiality, or if it involves handling large sums of money. Of course, an employer has (restricted) access to a report, only upon written consent by the potential employee. Insurance companies also determine the premium a person would need to pay for their insurance policies on the basis of the credit score.
While in India lenders currently do not ascertain risk solely on the basis of the score, they do use the credit score as the first piece of information, if nothing else then to filter a loan application. Yes, there are lenders out there who are willing to offer loans to people with low CIBIL score, but the rates of interest tend to be significantly higher, and the person is likely to have to shell out more by way of margin money since the possibility of the sanctioned loan amount being lesser than what is applied for is also real.
Hence it is prudent to always maintain a good credit score, and ensure that when you do require finance, you are able to avail of it on the most competitive terms and conditions. You could also do a free CIBIL check online, via websites such as www.freescoreindia.com to keep track of your credit health.