A credit score or CIBIL score is an important parameter for every bank or financial institution to assess creditworthiness. Read more to understand the impact and importance of a credit score.
Why is a CIBIL Score Important?
A credit score helps lenders gauge the creditworthiness of a borrower and their ability to pay back a loan. This score is assigned by credit bureaus and can affect different aspects of a loan such as:
- Loan amount
- Interest rate
- Loan tenure
- Loan approval
It is important not to underestimate credit scores since they can influence the approval or rejection of future loans. Learn how to take charge of your CIBIL score by paying attention to the factors influencing it.
What are the Factors That a Credit Score is Based On?
Behind the numbers itself, there are four main factors that can influence your score. Banks and financial institutions use this score to determine how likely you are to pay back your debt. These are the building blocks of CIBIL scores:
- A borrower’s repayment history is a record of their payment of bills, EMIs, and loans. Missed or delayed EMIs can lead to a decline in credit scores. A person with no credit history will be starting from a credit score of 0.
- The type of loans taken includes secured loans that involve collateral or unsecured without collateral. Too many unsecured loans in a short time can damage your credit score.
- Credit history shows whether the borrower has consistently paid their monthly instalments over a long time.
- Credit Utilisation Ratio (CUR) is the percentage of the credit limit being used. Borrowers should not spend more than 30% to 40% of the credit limit since anything higher indicates a ‘credit hungry’ appetite.
Since a credit score hinges on all these factors, what is the ideal credit score to have?
The Ideal CIBIL Score
A credit score ranges from 300 to 900. An ideal score is anything above 700 which indicates responsible credit behaviour. You are likely to get a loan approved with a higher CIBIL score.
Read on to learn about the benefits of having a good credit score.
The Benefits of a Healthy Credit Score
Banks, Non-Banking Financial Companies (NBFCs), and lenders offer loans based on the borrower’s risk profile. Here are a few advantages that a good credit score brings:
- Low-interest rates for loans and credit cards along with discounts in processing fees
- More negotiation power for better loan terms
- Faster approval process for credit and higher credit card limits since the borrower is considered low-risk
- Higher loan amounts and credit limit because the borrower has demonstrated better creditworthiness
- Access to collateral-free loans from private organisations such as Propelld
If a healthy CIBIL score can open so many doors, what happens if your credit score is low?
What is the Effect of a Bad Credit Score?
A low credit score below 600 can affect the loan application process. Here are some of the factors that change:
- Rejection of loans or credit card applications since lenders might be unwilling to take risks based on the borrower’s credit history
- No pre-approved loan offers since banks and financial institutions might not want to take the risk lending to a borrower with a low score
- A higher rate of interest on loans since the interest level rises with the risk level of the borrower
- A very low score can affect employment prospects with some banks and financial institutions
- More hard inquiries which is when a lender requests to review your credit report as part of the loan application process. Hard inquiries are used to check your CIBIL score and can also lower your score
Banks or other lending institutions might take a harder look at your credit score and reject certain education loan applications. There are other options that you can consider when applying for a loan for education.
Customised Loans With Propelld
Propelld provides collateral-free loans for education. Propelld has a unique underwriting process to assess the risk associated with a loan. The organisation takes into account a student’s academic performance, future earning potential, along with credit history which banks and lenders don’t do. These student loans are customised with benefits such as:
- No-cost EMIs
- EMIs over one-shot payments
- Collateral-free loans
- A 100% digital loan application process
- Quick approval process within 48 hours
A healthy credit score can open many financial doors for you and simplify your loan application process. While working towards building a good credit score, you don’t have to compromise on education or upskilling with a little help from Propelld.
Don’t stop there, learn more about credit scores by reading this list of commonly-asked CIBIL score FAQs.
The Most Frequently Asked Questions About Credit Scores
1. What is a good range for a CIBIL score in India?
A CIBIL score between 700 to 900 displays higher creditworthiness. A credit score of 650 is still considered good but it might be tougher for you to get an unsecured personal loan.
2. What are the benefits of a credit score over 800?
A high credit score of 800 means that you are an exceptional borrower. You are likely to get faster credit approvals, higher credit limits, and lower interest rates.
3. Why is a CIBIL score important and can I get a loan if my CIBIL score is low?
A lower credit score indicates a higher risk for lenders. If you want to apply for a loan with a low CIBIL score, one of the ways of doing this is to apply with a co-applicant who has a better credit score than you.
4. What are the repercussions of a bad credit score in India?
A low credit score between 300-500 might mean higher premiums on insurance policies, difficulty securing home loans, and a lower loan amount.
5. If my CIBIL score is negative, can I get a loan?
A CIBIL score of 0 or -1 means that there is no credit history or a borrowing track record of fewer than six months. This score might lead to a loan rejection. Lenders will need to check other information about the borrower such as:
- Balance in a savings account
- That their cheques haven’t bounced
- Type of residence they are living in
6. What if my CIBIL score is low, can I increase it in a month?
It might take between 4-12 months to improve your credit score. If you have a poor CIBIL score or no credit history, you can start with smaller loans and pay your EMIs on time to build a good credit history.
7. How can I build credit?
There are four ways to build credit:
- Repay loans on time
- Pay off credit card dues
- Keep your Credit Utilisation Ratio (CUR) to the minimum
- Don’t apply for loans too often