A bank or financial institution will generally take a few days to carefully consider your loan application before accepting or rejecting it. They review your creditworthiness as well as assess the loan amount based on factors like your past credit history and current liabilities. Based on what they find, they will assess the loan amount they can give you. But how do they get the information they need to make a decision? Simple, they go to a Credit Information Company (CIC). One of India’s most reputed CICs is the Credit Information Bureau (India) Limited, better known as CIBIL. Let’s find out more about how this bureau works.
What Is CIBIL?
Founded in August 2000, the Credit Information Bureau (India) Limited or CIBIL, is India’s first CIC. The credit bureau collects and stores your credit information. They have records of your performance and repayment on all credit cards and loans. All this information is then processed and shared with financial institutions that request it so that they can assess the loan amount you are eligible for. According to a Reserve Bank of India (RBI) mandate, all financial institutions in India should be a member of all CICs.
Your Credit Information Report
Banks and other lenders submit all loan and credit card details to CIBIL every month. Once the information is obtained and your records processed, CIBIL draws up your Credit Information Report (CIR). While a CIR does not have any records of your savings, your credit payment history across all loan types and credit institutions over a period of time will be outlined.
CIBIL Score And Its Role In Loan Approval
Your CIR will have your CIBIL TransUnion score on it. Your CIBIL Score, or CIBIL TransUnion score, is a three digit figure ranging between 300 and 900. The score is determined based on the information that credit institutions have handed over to CIBIL over a period of time.
Your credit score is crucial when applying for a loan, as it quickly helps loan providers determine whether they will evaluate your application further or not. CIBIL studies show that loan providers are more likely to give you a loan if your score is over 720. If the loan provider decides to evaluate your application further based on your CIBIL score, they will then look at your complete CIR and determine your eligibility.
Your eligibility will depend on whether the provider feels you have the ability to take on the debt, and if you can repay additional outflow given your current commitments. Once these two steps are completed, the financial institution may ask you for your income papers and other documents to take the loan process further.
Can I Find Out My Score?
Yes, an individual can find out their personal CIBIL score. This can be done by visiting the CIBIL website and filling up a form before paying for the information.
Factors That Affect Your CIBIL Score
There are 4 major factors that have an influence on your CIBIL score:
- Payment History: Your CIBIL score will tell potential loan providers if you are capable of dealing with a debt burden and if you can repay the loan. Any previous late payments or EMI defaults is likely to negatively affect your score.
- High Utilisation of Credit Limit: When there is an increase in the current balance of your credit card, it indicates an increased repayment burden. This could also negatively affect your score. It is important to keep in mind that increased spending on your credit card does not automatically mean your score will be affected negatively.
- Higher Percentage of Credit Cards/Personal Loans: Personal loans and credit cards are both types of unsecured loans. Having a high amount of personal loans and credit cards, and no secured loan (like a home loan or auto loan) is likely to have a negative effect on your CIBIL score. If you have a balance of both secured and unsecured loans, it could have a positive impact on your score.
- Recent New Accounts: An increase in the number of loans and credit cards sanctioned to you means an increase in your debt burden. If numerous loans and credit cards are sanctioned to you over a short period of time, your score will be affected negatively.
What Can I Do To Increase My Score?
A good credit history will work wonders in improving your CIBIL score. Here are a few ways in which you can maintain a good credit history:
- Pay Dues on Time: Any late payment you make is viewed negatively by lenders. Ensure all your dues are paid on time.
- Maintain Low Balances: Avoid using too much credit. If you control your credit utilisation, you won’t have any heavy debt, and it won’t have a negative impact on your score.
- A Healthy Mix of Credit: As mentioned earlier, a good mix of unsecured as well as secured loans is a good way to keep your credit rating up.
- Moderation in New Credit Applications: It is important that you do appear as somebody who is continuously seeking excessive credit. Think about whether or not it is really necessary before applying for new credit. Exercise caution in your applications.
- Monitor All Accounts Carefully: Most people do not have just one account. It is possible that you have co-signed, guaranteed, or jointly-held accounts. You need to check on all these accounts regularly, as you will be held accountable and responsible for any missed payments from any of these accounts. As we already know, a missed payment will negatively affect your score.
- Review Credit History: Make it a practice to purchase your CIR at regular intervals. That way you are aware of your credit history, and you will be able to work at improving it.
We are already aware of the fact that our CIBIL score is important as it can affect our loan application process. We are each responsible for ensuring that our own CIBIL score stays above 720 by maintaining a good credit record.