14/05/2017 12:25 PM IST | Updated 14/05/2017 12:25 PM IST

A Bad CIBIL Score Can Doom Your Loan Application. Here’s What You Should Know

How well do you know you credit history?


If you're planning to get a home loan or a personal loan from a bank, a good CIBIL score can make all the difference.

Many banks have begun assessing CIBIL scores to make decisions to lend or to decide what interest rate to lend at, depending on where the individual's score stands. In fact, many institutions will reject outright a loan application if the score falls below their minimum requirements. Here's what you should know about CIBIL score and what you should be doing to improve it.

What is a CIBIL score?

In India, the Credit Information Bureau India Limited (CIBIL) collects extensive records of financial and credit history on all individual and business borrowers by partnering with leading banks and housing finance companies.

It typically assigns a score between 300 and 900 to individual borrowers and businesses based on evaluation of their credit worthiness and loan repayment history. That means if someone has a bad track record in paying their EMIs or credit card bills on time, the person would have a low credit score.

Why is it important?

It's important simply because more and more banks will take into account your CIBIL score to see whether or not you can qualify for a loan and how your loan and EMIs should be priced. About 79 per cent of loans in India are approved for individuals with a CIBIL score greater than 750, according to the bureau.

Not just loans, according to media reports some companies in India are even starting to collect credit scores on job candidates while making recruitment decisions. Even e-commerce companies can decide whether or not to offer financing on a big ticket purchase based on your score.

So how does one get a CIBIL score?

The day you take out any loan--a home loan, an auto loan, or even a credit card--and start making repayments, a credit score is automatically generated on your behalf and reported to the credit bureau. After this point, all your credit-related behaviour patterns and repayment habits are regularly recorded affecting your overall score. Member banks and financial institutions of CIBIL are, in fact, obligated to report each time you open an account, history of all the loans you have ever applied for, all the loans you have repaid in full in the past, as well as details of each and every repayment on your loans.

How to build a good CIBIL score?

It's a good idea to find out your score first. You can request a copy of your CIBIL score with the credit bureau a few times a year. Here's a link to the web application.

If you are new to credit--that is if you've never taken out a loan or a credit card--it's a good idea to get a small loan or a credit card to start building your credit history.

In case your score is low, there are ways to start improving your credit history. Aditya Kumar, Founder and CEO of online lending platform Qbera suggests opting for a secured loan--an auto loan or a home loan--and making sure you pay the EMIs on time, which should result in positive movement on your score.

Another way is to use credit cards responsibly. That includes paying all your credit card dues in full and on time, and to not max out the entire credit limit on your card. It is usually recommended to keep the credit card utilization below the 40 per cent limit. That means if your credit card limit is Rs 1 lakh, you should spend a maximum of Rs 40,000 on the card to maintain a good score.

You should also avoid applying for credit with multiple institutions, especially for personal loans and credit cards in a short span of time, according to Kumar. That is because every time a lender makes an inquiry on your CIBIL score, your score gets affected. "Too many inquiries in a short span of time indicates credit hungry behaviour which is not looked upon nicely," notes Kumar.

Negative history

Bad credit history or patterns like missing a payment or defaulting on a loan can stay on your credit report for a while, clearly visible to future lenders. That is because every payment you make--whether made on time or delayed--is recorded for the last 24 months. Record of missed payments and late payments, showing even how many days you were past due will be shown clearly in your report, warns Kumar.

The actual impact on the score will depend on what type of loan you may have defaulted on. For example, a missed EMI on home loan will have much greater impact versus a missed payment on a credit card by 30 days, he says.