A person’s CIBIL score plays an important role in the loan application process. It acts as an individual’s first impression to a lender. The higher one’s CIBIL score, the greater will be the chances of loan approval from banks.
CIBIL score is the first thing that banks or other financial institutions check before proceeding with the loan application further. If an applicant has a high CIBIL score, lenders view their application favourably. As a result, they may offer better repayment terms like lower interest rates and longer tenures.
Here is a detailed overview of the meaning, importance and purpose of CIBIL scores.
What is a CIBIL score?
The Credit Information Bureau of India (CIBIL) score is a report card used to analyse an individual’s credit history and financial stability.
CIBIL is a 3-digit number calculated considering the financial history of an individual. The score ranges between 300 and 900. A higher CIBIL score increases the chances of loan approval such as a home loan or a personal loan. Individuals with CIBIL scores of 750 and above get easy loan approval.
Purpose of the CIBIL score
Individuals prefer a high credit score to increase their chances of getting approval for the preferred loan amount. A CIBIL score reflects the creditworthiness and loan repayment ability of an individual on time.
Banks consider various factors such as payment history, credit types, loan accounts, and credit history to determine the CIBIL score of applicants. Different financial institutions set different benchmarks to issue loans to applicants.
To easily get approval when applying for a home loan, borrowers need to have a CIBIL score of 750 or above. For personal loans, however, this score may need to be higher to compensate for the absence of collateral.
Importance of CIBIL score
Here are the reasons stating the importance of CIBIL scores:
This factor reflects the ability of an individual to manage their finances. Holding a long credit history showing timely repayments leads to a high credit score. One must maintain a good credit score for the hassle-free approval of home loans, auto loans, personal loans or credit cards.
A good credit score can be attained by paying one’s bills on time, whereas, a delay in bill payment lowers one’s credit score.
- Lower interest rate
Different financial organisations provide different rates of interest based on the credit score of applicants. A good credit score provides individuals with a low-interest rate for loans due to their low credit risks. In addition, low-interest rates indicate financially stable borrowers. This means they will borrow more money in the future and repay on time.
- Loan application approval
CIBIL score helps to understand how fast an individual has paid off their loans. Accordingly, the lenders can also decide the type of loan they can offer to the borrowers.
A low CIBIL score makes the loan approval process difficult for the upcoming loan. Lenders might refuse to grant loans if there is a delay in repayment and accumulation of high debt.
On the other hand, the CIBIL score increases the chances of loan approval. The chances of risk of debt in the future remain minimal. Not only this, but a high CIBIL score also improves the financial stability of an individual.
- Longer loan tenure
Availing a good CIBIL score provides loans to applicants with longer tenure. This thereby enables them to repay their loans on time but banks charge a high interest rate. Repayment tenure determines the interest rate on loans. Longer repayment tenure lowers the burden of EMI.
- High credit limit
The loan amount to be borrowed is an important factor to consider while applying for any loan. Banks approve loans at a low-interest rate for individuals availing high CIBIL scores. Not only this, they get the maximum loan amount because lenders remain assured that the amount will be repaid on time.
Many reputable financial institutions provide pre-approved offers to their customers. These offers apply to products such as home loans and loans against property. Applicants can accept these offers for a faster loan approval process in the future. One can check pre-approved offers from the lender’s official website by submitting their respective names and contact details.
What are the types of CIBIL errors?
Sometimes, CIBIL reports generate certain errors. This leads to a reduction of one’s CIBIL score, thereby lowering the chances of loan approval in the future. Getting these mistakes corrected is necessary for maintaining a good credit score.
Here are the different types of errors found in CIBIL reports:
- Incorrect personal information
It might happen that a CIBIL report has included an incorrect name spelling or PAN information of an applicant. It is also possible that there is a wrong address, age, or date of birth.
- Incorrect overdue amount
At times, the amount owed remains lower than what gets reflected in the CIBIL report. This takes place when accurate information is not updated with CIBIL.
- Unrecognisable account
CIBIL may add a loan account that does not belong to the applicant. These kinds of errors reduce the chances of getting any credit in the future. If left unchecked, this can lower one’s credit score significantly. One must ensure to raise a dispute and solve this issue.
- Duplicate accounts
Sometimes, CIBIL prints the same loan account twice thereby raising the number of active accounts. The presence of higher active accounts reduces one’s CIBIL score. This can create a very negative impact on credit eligibility.
Hence, if these issues persist, one must resolve them at the earliest if there is any plan of taking any credit in the future.
Other than that, borrowers can improve credit scores by repaying their debts on time without ever missing an EMI. By keeping old credit cards active, people can maintain lengthy credit history, which helps to maintain good credit scores. Finally, borrowers must maintain relatively low credit utilisation to avoid negative effects on their credit scores.
To sum up, the CIBIL score is of utmost importance and all banks and NBFCs remain dependent on this score to approve loans. Irrespective of smart financial planning, emergencies can arise anytime and an applicant might need to apply for loans. It is then when the purpose of CIBIL scores matter the most.