The role of CIBIL score in loan approval: what lenders look forMay 16, 2023 . Real-Estate Industry . 10 min read
CIBIL stands for Credit Information Bureau (India) Limited. Among the four credit information companies licensed by the Reserve Bank of India, it is the most popular. The other three companies are Experian, Equifax and Highmark. If you plan on taking a loan and if you want your loan to be processed & approved on time, you need to maintain a good CIBIL score as it can also help you get your loan at a lower interest rate.
Currently, the company maintains credit files of over 600 million individuals and 32 million businesses.
The meaning of the CIBIL score
Your CIBIL score is a three-digit number ranging between 300-900. It denotes your creditworthiness. You need to maintain a higher one to be able to get a home loan approval. All banks and non-banking financial institutions require you to have a CIBIL score of 685 or higher to consider you for a loan. You should endeavour to bring it as close to 900 as possible.
Having a CIBIL score of 750+ is considered an excellent score. It conveys to your lenders that you are a dependable borrower, and you will return the money they are lending you, with interest, on time.
Why is it important to maintain a good CIBIL score?
When you approach a lender for a home loan, it is basically your word they need to trust if they cannot refer to a credible agency to gauge your creditworthiness.
For the lenders, giving you a home loan is an investment. Profitable, but a risky investment. Every business wants to invest in a safe bet. Therefore, when they are giving you money, they want to make sure that you will be able to return not just the principal, but also the interest. Your CIBIL score reassures them. It is like your track record. Since it is maintained by a third party, it is more credible than your own word.
How to maintain a good CIBIL score
Your CIBIL score is normally updated automatically when you interact with your lending agency on a regular basis. For example, if you’re using a credit card, you’re taking credit from your bank. You make credit card payments. You may make your payments on time, and your payments may be delayed sometimes. When you make your payments on time, it adds to your CIBIL score automatically because this information is shared by the banks with the credit scoring company. Your score increases. Inversely, if you don’t make payments on time, this information is shared too. Your score decreases.
Here are a few things you can do to maintain a good CIBIL score.
1. Avoid late payments
This is an obvious piece of advice but you will be surprised to know how many people don’t take making timely payments seriously. They don’t even realize that a delay of a few days or a few weeks is having an adverse effect on their CIBIL score.
Whether you have taken a business loan, or you regularly use your credit card, it has a direct relationship with your CIBIL score. If you want to take a home loan in the future, make sure that you make your credit card payments and loan payments on time. In fact, you can set them on auto-payment mode so that you never make late payments even by mistake.
2. Keep a tab on your CIBIL score
There may be some errors in your CIBIL score. Due to no fault of yours, you may have a lower score. Some entries go missing. Some figures are entered wrongly. Whatever the case, there may be a chance that if you have a lower score, the fault does not lie with how you handle your credit.
But, if you find this out at the time of taking a home loan, you will be in trouble while getting loan approval. Lots of time will be wasted sorting things out. Therefore, make it a habit to regularly check it.
What if you think there is an error in your CIBIL score? You can go to their website and fill out an online dispute form. Once they receive your application, they will contact your lender and make the necessary changes.
3. Avail credit for the sake of maintaining your CIBIL score
Some people are not comfortable with using credit cards. Nonetheless, if you want to maintain a good credit score, it is better to use your credit card occasionally and then make timely payments so that you have a healthy record in the CIBIL database. You can also take a small loan and then return it with interest, on time. This way, favourable entries will be made in the CIBIL database.
4. Be mindful of your credit card limit
Don’t spend your entire credit card limit frequently. A good ratio is 30%. That is, if your credit card limit is Rs. 100,000, try not to go beyond Rs. 30,000. This will also encourage you to limit your spending.
What do the lenders look for in your CIBIL score?
1. Payment history
Mostly, your payment history. Although there are many factors that impact your overall CIBIL score, ultimately, they want to be reassured that you are a safe investment. Usually, your payment history is one of the most significant factors your lenders look for in your score.
2. Outstanding debt
They also look at how much outstanding debt you have. This is because, the more money you need to pay to other lenders, the harder it will be for you to pay back the amount you are asking for now. So, make sure that you don’t have a significant existing debt. Ideally, try to pay all your debts before applying for a new home loan.
3. Credit card usage pattern
Have you been using your credit card responsibly? What is your spending pattern? Are you constantly exhausting the limit of your credit card? Do you make timely credit card payments? Do your lenders need to constantly call you to remind you that you need to pay? If yes, it will be harder for you to get your home loan approval.
4. A written-off loan
Has some existing loan been written off? This means you couldn’t pay back the loan and your bank or the creditor had to cut its losses. This is not an impressive sign in your CIBIL report.
5. EMI-to-income ratio
They also look for the EMI-to-income ratio. The chances of your home loan approval are slim if your prospective EMI may exceed 50% of your monthly salary.
Almost 80% of the loans that are approved are given to individuals who have a credit score of more than 750. It may take years to build a healthy CIBIL score. Therefore, whenever you’re making a transaction through your credit card, or whenever you’re taking a loan and then making the payments, always keep this in mind.
With a healthy CIBIL score, it is cheaper to borrow money. You enjoy a greater bargaining position. It is easier to rent an apartment because sometimes even landowners track your CIBIL score. You can also get better credit cards with enhanced options. Of course, getting a home loan can be smooth sailing on the waves of a good CIBIL score.
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