CIBIL Score – Understand How It Affects Your Loan Application

You had recently applied for home loan with a private bank. You had done thorough research and were really keen to avail loan from this bank. However, your loan application got rejected. You were informed that your loan could not be approved since your CIBIL score was too low. You had never heard of CIBIL score before. You always thought the bank’s decision was solely driven by your ability to repay debt. Your cash flows were good enough to meet EMI obligation. But a low CIBIL score stumped you. So, what exactly went wrong? A low CIBIL score certainly played a part. How could a score you weren’t even aware of spoil your case? Let’s try to find out more about CIBIL and CIBIL score and how lenders use the score while considering your case. We will also discuss the factors that affect your credit score and the ways to improve your credit score.

What Is CIBIL?

CIBIL or Credit Information Bureau (India) Limited is India’s oldest Credit Information Company or Credit Bureau. CIBIL maintains payment records of individuals’ and non-individuals’ (commercial entities) pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders on a monthly basis. CIBIL uses this information to generate Credit Information Report (CIR) and Credit Score.

Please understand CIBIL is not only credit bureau in India but it is the oldest and the most popular one. Experian Credit Information Co. Of India Pvt. Ltd and Equifax Credit Information Services are among other credit bureaus where you can access your credit report. All the credit reports provide similar information. All the credit bureaus rely on the information furnished by credit institutions (banks/other lenders/credit card companies) to make an assessment about your creditworthiness and arrive at your credit score. In this post, we limit ourselves to CIBIL report and discuss what it conveys.

What Does Your CIBIL Report Contain?

A CIBIL report can be divided into six parts.

CIBIL TransUnion Score (Credit Score): This reflects your creditworthiness.
Personal Details: Personal details such as PAN, passport number, Driving license number, Aadhar number ,Voter id, Date of Birth etc
Contact Information: Address, e-mail and phone contact details
Employment Information: Monthly or annual income details as mentioned by you in your loan/credit card application.
Account Information: This is the most important section. It contains details about all the credit facilities (loans, credit cards etc) availed by you. It shows your payment behaviour, current loan/credit card balances, default history, month on month payment record for the last three years. Banks/lenders can use this information along with the income details to easily assess your repayment ability.
Enquiry Information: This section contains details about credit enquiries made by banks. The date and purpose of enquiry along with approximate amount is mentioned.

Note: All the information above (except credit score) is reported to CIBIL by banks/financial institutions. Hence, there may be errors in reporting from banks or even by you while filling out various application forms. For better understanding about the CIBIL report, you can visit FAQ section on CIBIL website.

What Is A Credit Score?

Your credit score ranges between 300 and 900. Higher the score, the better is your credit history. A higher credit score means you are more likely to meet your debt obligation. The credit score is calculated using information in the Accounts and Enquiries section of your CIBIL report.

The exact methodology behind calculation of credit score is proprietary and is not disclosed. However, CIBIL has disclosed the factors that can affect your credit score.

What Is A Good Credit Score?

It is difficult to put a number to it. Various banks/financial institutions may have different internal guidelines about usage of credit scores. They may or may not have a cut-off based on credit score.

However, as per CIBIL, nearly 90% of the new loans are sanctioned to people with a credit score greater than or equal to 700. Therefore, higher the credit score, better the chances of your loan getting approved.

This does not mean individuals with low credit scores will not get any loans sanctioned. But yes, the chances go down if you have a low credit score.

A high credit score can create a good first impression. And first impression matters.

What Does “NA” Or “NH” In The Credit Score Mean?

This means you are new to credit system or do not have enough credit history for CIBIL to score you. This can also mean that you do not have any credit activity in the last years. Though it is not a bad thing per se, a few lenders may have an internal policy of not extending loans with customer with little credit record.

How Do I Access My CIBIL Report?

You can visit CIBIL website and access your CIBIL report by making an online payment of Rs 500.

Factors That Affect Your CIBIL Score

Following are the major factors that affect your credit score:

Payment history: Late payments on your credit cards or EMI default shows that you are facing issues in keeping up with existing credit obligations. This affects your credit adversely.
High utilization of credit limit: A consistently high utilized balance under your credit card indicates increased repayment burden. This can affect your credit score negatively.
Higher percentage of unsecured loans: If you have a high percentage of credit card and personal loans, then your credit score may be adversely affected. You need to have balanced mix of secured (auto, home) and unsecured loans (personal loan, credit card). The rationale is that secured loans are used to create an asset while unsecured loans/credit cards are primarily used for consumption.
Many new accounts opened recently: If you have recently got many loans sanctioned and credit cards issued, your repayment ability is expected to down for any further loans. CIBIL reflects this by negatively impacting your credit score.
Too many enquiries for loans/credit cards: It is an extension of point no. 4. If you are applying for loans/credit cards with too many banks/financial institutions, it may reflect that you are in desperate need of funds (Credit hungry). This can adversely affect your credit score. Most banks check your credit score as part of their sanction/approval process. CIBIL uses this information to assess the enquiries made on your behalf.

Factors That Do Not Affect Your CIBIL Score

Your education
Your savings account behaviour (non-credit behaviour)
Religion/race/ethnicity
Gender

To sum up, anything that is not related to your credit behaviour does not affect your credit score.

How Do Banks/Lenders Use CIBIL Report?

From lenders’ perspective, they can use CIBIL report to find about applicant’s credit usage/credit history from the entire banking system in the country. CIBIL report contains information about present and past credit facilities availed by the applicant and his/her payment behaviour.

Please note that a high credit score or good CIBIL report does not guarantee that you will be sanctioned a loan. However, a good score can certainly make the lender take a positive view of your application. Banks/other lenders will look at various other parameters such as your repayment ability before they make the final decision.

CIBIL score can be considered a hygiene factor. A high CIBIL score may not guarantee a loan approval but a low credit score will certainly spoil your case.

Why Does Your Credit Score Matter?

We have already seen that banks/lenders consider your credit score while assessing your loan application. Your CIBIL score creates the first impression. Not only does a good credit score improve chances of loan approval, it can also help you negotiate a lower interest rate with banks.

How To Improve Your Credit Score?

I have already discussed the factors that affect your credit score negatively. You just need to focus on those areas to improve your credit score.

Make timely payment of EMIs and credit card bills. It is better to make credit card payments in full. By paying the minimum amount due, you may be able to keep your account regular, but consistently high balance on your credit card will not be taken positively by CIBIL.
Avoid unnecessary debt. Have a balanced mix of secured and unsecured loans
Access your CIBIL report on a regular basis and point out the errors in your credit report, if any
Apply for loans/credit cards after doing proper research. Applying indiscriminately for loans and credit cards will result in hard enquiries by credit institutions for your CIBIL report. So, do your research and apply only to select banks. When you access your own credit report, it is considered a soft enquiry and does not affect your credit score.

Note: The change in your credit score won’t happen overnight. It will take some time. You need to maintain good credit behaviour on a consistent basis to get a high credit score.

What To Do If The Information In The CIBIL Report Is Not Correct?

You can raise a dispute with CIBIL by submitting an online dispute resolution form if you see a mistake in your CIBIL report. CIBIL takes up your request with the concerned credit institution. Once the credit institution confirms the error, CIBIL reflects the correct information in its database. If you are not satisfied with the resolution, you can raise a request again or directly approach your lender/bank/credit card company.

Note: As per Credit Information Companies Act of 2005, CIBIL cannot modify any information in its database without confirmation from concerned bank/financial institution.

Alternatively, you can directly approach your bank/credit institution and request to rectify the errors in their reporting to CIBIL.

Conclusion

If you are planning to apply for a loan, do make it point to download your credit score before you apply. If you see the score is too low, try to improve the score by improving your credit behaviour. On the other hand, if you notice an error in the report, raise a dispute with CIBIL. Additionally, request the credit institution to rectify the error reporting to CIBIL. A good CIBIL score not only increases chances of getting your loan application approved but with a high score, you may also be able to negotiate a lower interest rate with the bank/credit institution.

Since it takes time to improve your credit score, it won’t be unwise to access your CIBIL report on a regular basis. Improve the credit behaviour, if required and get the errors in your report rectified.