Thursday, 21 Feb 2019

How Does a Poor Credit Score Impact Your Loan Approval?

CIBIL Score is an instrument used by banks to check the credit value of loan applicants or borrowers of Personal Loan or any other loan. It is a 3-digit credit score (ranging from 300 to 900) given by CIBIL (Credit Information Bureau India Ltd.) to point out a person’s credit score based on their past credit history. This information helps banks and other financial institutions to evaluate loan applications. A CIBIL score of 700 and above is considered to be good and eligible for Personal Loan approval whereas for a secured loan like a Home Loan, Loan Against Property and so on, having a credit score of 650 and above is enough.

CIBIL, also known as the Credit Bureau is India’s first credit information company that maintains records of all individuals and companies credit information concerning loans and Credit Cards applied. This information is submitted to CIBIL by banks and other lenders on a monthly basis to maintain a Credit Information Report of every individual. CIBIL is licensed by the RBI and it is governed by Credit Information Companies Regulation Act 2005.

HDFC, just like other banks, also check the applicant’s credit score before granting a Personal Loan. Based on this score they assess if the applicant is eligible for loan or not. If the credit score is less than the certain minimum score, the bank will either reject the application or can still grant it at a higher interest rate based on the information in applicant’s credit. The more your credit score will be, the more will be your eligibility to Get HDFC Personal Loan or a Personal Loan from other lenders.

Importance of CIBIL score when applying for a Personal Loan

CIBIL score plays a vital role in the lives of people who want their Personal Loan to get sanctioned for fulfilling their financial commitments in life. The first thing lenders check about the person after receiving a loan application is the credit score. If it is low, the application will most likely be rejected and if it is high, the creditworthiness of the applicant is checked before going into further procedures of approving a Personal Loan application.

CIBIL does not decide if the loan or Credit Card application should be sanctioned or rejected nor can it has powers to delete any records from the Credit Information Report. It is meant to help both the banks and the applicants to take an informed decision. The CIBIL score ranges from 300-900 and lenders generally consider credit score above 750 to be good and creditworthy.

There are several ways in which you can enhance your credit score to become eligible for getting your loan sanctioned easily.

  • Always make payments on time
  • Applying for Credit Cards cautiously
  • Never default or miss any loan or Credit Card payment
  • Do not exceed Credit Card limit
  • Strike a balance between secured and unsecured loans
  • Make timely payments even if you have a joint account
  • Buy a CIR (credit information report) to keep the track record of your credit history

How CIBIL scores are used by lenders

Before CIBIL scores came into action, lenders used to conduct an internal assessment of the applicant before sanctioning the loan. Now lenders can easily access applicant’s information with the easy availability of CIBIL scores and Credit Information Reports as CIBIL has a huge database of customers with their credit scores. The lower limit of CIBIL score is 300 and the higher limit is 900. Higher the credit score, better the chances of loans being approved, lower the credit score, higher the chances of loans being rejected.

There are certain things that should be kept in mind by every loan applicant:

  • For any incorrect information provided by CIBIL, the individual can get it rectified by submitting valid proofs and documents.
  • Lenders check the credit and loan history to identify if the applicant is a defaulter or whether there are any overdue payments to be made by them. They also check the work profile to get an estimate of equated monthly instalment (EMI) to income ratio. If your monthly EMI is more than 50% of your monthly salary, then there are high chances of getting your Personal Loan Application being rejected.
  • If a person already has two loans and has not paid the EMIs of even one of the loans, then it is quite a possibility that his/her Personal Loan application gets rejected if he/she applies or might need to pay higher interest on the loan which he is seeking due to low credit score history.

Factors affecting CIBIL score

There are many factors that affect the CIBIL score. Some of them are:

  1. Multiple loans and Credit Cards

Having multiple loans and Credits Cards may have a negative impact on your credit score because it may be an indication that you are already under high debt.

  1. Getting your Credit Card limit exceeded

Requesting to increase your Credit Card limit may also negatively affect your credit score, thus indicating that you are totally dependent on Credit Cards and you are overburdened with due debts.

  1. Delayed payments

Delayed payments highly impact your credit score in a bad way as it shows your highly irresponsible behavior towards clearing your previous debts or it may indicate you are not capable of paying them. Also, monitor your single and joint accounts regularly to ensure that no payment is missed.

  1. Many Credit Cards but no loans

To have many Credit Cards but no loans can also affect your credit score. It is important to maintain a balance of both revolving credits such as Credit Cards and non-revolving credits such as a Home Loan to improve your credit score. It indicates your range in managing different types of credits.

  1. Not tracking your credit information report

It is important to timely check your credit report as it may contain some faulty or wrong information which can bring down your credit score considerably. It is advisable to purchase these reports online and check them at least every 6 months.