11-Jan-2016 written by : FSI-Team
Imagine this. You have it all figured out. All your plans for future are laid and you are all set and raring to begin living your dreams. You have set your eyes on that dream house, your much wanted car, your son will go to the best college and how you will pay for it, your expansion plans, your dream destination and that entire jing bang. You have it all planned on how you will fund it. Until the day you receive a letter from the bank that your loan application has been rejected. Now what? First thing you need to do is check your CIBIL rating.
A common manâ€™s financial objectives are buying a home, a car, fulfilling educational needs, providing for amenities, which include a lot of gadgets too. To meet any of these goals, one might need to take a loan. In order to take advantage of any credit facilities, be it for home, car, education or other personal needs or even getting a basic credit card, one must seek a bankâ€™s or other lending institutionâ€™s support. This is where CIBIL comes in. Before we proceed let us go through a basic understanding on what CIBIL is.
CIBIL stands for Credit Information Bureau (India) Limited. It is the first of its kind body that records and maintains all individual and commercial information regarding loans and credit. It is the first Credit Information Company of India. It was founded in August 2000 with the objective to help lending institutions and prospective borrowers both.
In the era before CIBIL, a lot of banks had no clue about the background of the customer. They were duped by many loan seekers as customers would apply for loans to several institutions, make delayed payments or made no payments at all. They would then try to settle the loan for a smaller amount. The banksâ€™ books were painfully affected by this. The need to evaluate a customerâ€™s background before approving a loan application, gave rise to CIBIL. Using a CIBIL score, the lender can estimate the probability of a default payment.
CIBILâ€™s strong 900 member team includes all leading public and private sector banks, other non- banking financial institutions and housing finance companies. These companies send customer data to CIBIL every month alongwith details about payment received or default, account â€śsettledâ€ť or â€śclosedâ€ť, etc. CIBIL uses this data to generate a credit score which is then assigned to each customer. Based on this score the banks judge the likelihood of default on payment by a customer and accordingly approve loans. Your credit score is basically a summary of your credit history, represented numerically.
Once a bank receives an application for loan, the first thing they do, is to contact CIBIL and check the prospective clientâ€™s credit history and their CIBIL score. â€śItâ€™s important to note that nearly 90% of loans are granted for individuals with score greater than 700â€ť â€“ (source: CIBIL website). Although many factors are involved to check your eligibility before a bank sanctions your loan, out of those having a good CIBIL score (which means more than 700) has the maximum weightage.
Ofcourse, it may happen that although you have a good credit score but your application is not approved. The reason for same could be that you have maxed out your limit of using credit based on your income. The rule of thumb is to maintain an EMI to monthly income ratio at 50%. Incase you are already using credit facilities upto 50% of your monthly income, then you are not eligible to use more credit unless this ratio decreases. This means, that first you must pay off some of your loans in full and reduce your EMI, only then you can be eligible for further loans.
It would be unfair to say that CIBIL only helps the lenders. It also helps the borrowers. The higher the score the better are your chances of getting a loan approved. All banks and other non banking financial institutions want to endorse responsible borrowers, those with a smooth payment record. Thus customers with high credit score can negotiate terms and avail competitive rates of interest.
Do not be discouraged if you feel that you have a low score. Banks do not outright reject applications of loan for low CIBIL score. They may do further checks and verifications and possibly offer loans at a higher rate of interest. You can read more about it on our insightful blog.
Your CIBIL score acts as a first impression for the lender. Therefore, looking after your credit score is in your best interest.
Happy credit to you ☺