When you require a loan from any bank, be it personal loan, credit card loan, car loan or home loan, one of the first things that the banks do is that they check your CIBIL score.
So, what is CIBIL score? Why does it matter so much to the banks? How does it affect your eligibility to receive a loan?
All of your questions, and more, will be answered here. So, make sure to read thoroughly and not miss any of the crucial points.
What is the CIBIL Score and Its Relevance?
Before getting into the technicalities, let us understand the CIBIL score with a scenario.
If you want to take a loan, you would naturally approach any of the reputed banks. For the banks to provide you with the loan amount you are asking for, they need assurance that you are capable of paying back the borrowed amount in the stipulated period.
Naturally, the bank cannot take your word because they need concrete and quantifiable evidence before handing over the money. The TransUnion CIBIL Limited is an organisation in India that keeps track of your CIBIL score. They have all the records of your loans and have access to your credit information from various banks.
The banks that you approach to for a loan request CIBIL to provide your CIBIL score, which ranges from 300 to 900. By doing so, banks are able to check and verify your credit worthiness. The CIBIL score tells the banks of your loan repayment history, patterns and more.
Banks do not prefer to give large loans to risky customers. Hence, banks also assess your risk potential with the help of your CIBIL score.
In a nutshell, the CIBIL score is a three-digit number that ranges from 300 to 900. A CIBIL score of 700 or above is considered to be excellent and you will also be eligible to utilise apps like CRED that give you enticing rewards as you spend money using your credit cards.
The Advantages of Having a Higher CIBIL Score
Credibility to Negotiate
Banks try to underpay you; meaning banks do not always incline to give you the maximum loan you are eligible for. To overcome such objections, you ought to negotiate. When your CIBIL score is higher, you can negotiate without any chance of objections.
Greater Loan Amount
A higher CIBIL score entitles you for a higher loan amount. So, you can now buy yourself a bigger house or even your dream car. You do not have to settle for less.
Longer Repayment Time
A higher CIBIL score proves to the bank that you can be trusted and you can get longer tenure loans approved faster than others.
Eligibility for Exclusive Services
There are many services that are exclusive to those with a higher CIBIL score. For example, the mobile application CRED, which gives enticing and competitive rewards to its users as they use their credit card is exclusive only to people with a good CIBIL score.
How to Manage and Improve Your CIBIL Score?
The natural question that arises after reading about so many advantages of having a high CIBIL score is, “How can I improve my CIBIL score?” Here are 7 tips for you to maintain a good CIBIL score:
1. Pay Your Credit Card Bills on Time
On top of our list of tips to improve your CIBIL score is paying your loans and credit card bills on time. Defaulting on loans and going beyond your loan’s tenure can cause your CIBIL score to slide down very quickly.
Unfortunately, we might find ourselves in a situation where we are unable to pay our dues on time even if we are aware of the dates. In such cases, it is recommended that you clear your debts as soon as your financial situation is better so that your credit score does not go down further.
2. Automate Loan Payments
A very common mistake that many people do because of which their CIBIL score gets adversely affected is that they forget their due dates.
Given today’s fast-paced lifestyle, it is understandable for somethings to slip through our minds. The ideal solution to this is to make use of automatic loan payment modes like the Electronics Clearing System (ECS).
3. Do Not Take Large Loans Frequently
Some people tend to take loans from the bank very frequently. This is usually because of one of two reasons:
- They are financially unstable
- They are hungry for credit
Indicating to the banks that you are financially unstable will have a negative impact on your CIBIL score and it implies that you are likely to default on your loans.
Being hungry for credit refers to the state of the persons’ mind where they are desperate to improve their CIBIL score. So, they try to take up many loans, even if they are not required. This might translate to uncontrolled or irresponsible financial behaviour, which increases the risk potential.
4. Do Not Exhaust Your Credit Limit
Every credit cardholder has a credit limit. If your credit limit is, say, INR 1 lakh, then spend only about 30% to 50% rather than spending all of it.
Similarly, keep your EMI amounts to about 40% of your monthly income.
5. Manage Your Credit Cards
Many people have more than one credit card with them. Although this practice is acceptable, it is critical that you do not overwhelm yourself with credit cards.
A common negligent behaviour that can be seen in many is that they pay the credit amount of one card with another. This is not appreciated as you will get accustomed to taking more loans and often end up paying large sums in the form of interest. Such a practice has no positive implications and is best to avoid.
6. Pay As Much As You Can
Always aim to pay your monthly credit dues in full and not just the minimum dues, because even if you pay the minimum dues, your interest will get accumulated.
If you are in any kind of financial hardship, then try to clear the minimum dues at least. Paying some amount is better than paying no amount.
7. Take Loans Against Securities
As mentioned before, banks consider unsecured loans to be very risky. That also means that banks welcome secured loans.
If you want to rebuild your credit history or want more loan than your CIBIL score is allowing you to take, then taking secured loans like Gold Loans is a good idea. At this point, it is important to reiterate to not overdo this as it will again badly affect your CIBIL score.
Everything finally boils down to responsible banking. However, it is always advised to not take a personal loan to pay off credit card debt. The higher the CIBIL score, the better it is for both the customer as well for the bank. A high CIBIL score will also be very constructive during times of financial distress.
Take loans only when you need them and keep it in moderation. Is your CIBIL score high? What is your go-to mode of increasing and CIBIL score and which of the benefits of having a higher CIBIL score intrigued you the most?