When applying for a loan, it is important to know that banks take your CIBIL score into consideration.
Here’s all you need to know about CIBIL score and a good CIBIL score range.
What is a CIBIL Score?
A CIBIL score is a consumer’s credit score that tracks a person’s past credit behaviour, such as borrowing and repayment habits. It is a three-digit numeric system shared by banks and lenders with CIBIL. CIBIL sources individual financial data such as loan and credit card information from leading banks and other financial institutions in India.
CIBIL (Credit Information Bureau India Ltd) was incorporated in 2000 and is a part of RBI (Reserve Bank of India) that authorises credit to individuals. A CIBIL score ranges between 300-900, 300 being the lowest, representing a bad credit score. These scores are calculated based on six months of the individual’s financial data.
Why is a Good CIBIL score important?
A high CIBIL score will help in:
- The quicker and faster loan application process
- The faster loan documentation process
- Lower interest rates on the loan
- A higher quantum of loan
- Longer or more flexible repayment tenure
A CIBIL score is good if it lies between 750 and 900. This score will help banks and NBFCs consider a loan application for most retail loans, home loans, or vehicle loans.
CIBIL score ranging between 700 and 900
Having a CIBIL score between 700 and 900 is given a top priority on creditworthiness by lenders. This score suggests the trustworthy credit track record of an individual. This number indicates that individuals have used credit cards carefully, paid card fees, and repaid loans on time. People in this bracket do not accumulate large amounts of debt and deem themselves to be financially responsible. Individuals with a CIBIL score between 700 and 900 are given top priority by lenders.
CIBIL score ranging between 600 and 700
People with these scores are considered ‘subprime borrowers’ and do not qualify for better lending arrangements. This range indicates that payment has been delayed or defaulted on several occasions. Therefore, borrowers under this bracket need to pay heavy interest rates on loans. With this score, applying for a personal loan can be difficult as a bank may reject loan applications or charge higher interest rates.
CIBIL score ranging between 500 and 600
This CIBIL score will hinder getting loans from a financial institute. An individual should be vigilant about their spending pattern and should work towards improving CIBIL scores. People under this category should pay their credit card bills and loans timely. People should stay away from drawing money from lenders or credit agencies.
CIBIL score below 500
Here, there is a possibility that your loan will get rejected by the financial institute. The banks will not trust an individual due to a history of defaults and late payments. When a person asks for credit, the financial institutes run a credit check on the potential borrower’s financial situation. A bad CIBIL score might be alarming for the financial institute, and it can impair an individual’s borrowing and spending capacity.
How does your CIBIL score impact your capacity to borrow money?
Outstanding credit score
Here, the borrower has regularly paid his loan payment and credit card on time. A borrower will not have any negative comments on their credit report. Thus, lenders will profile your eligibility and offer a variety of loan benefits. A borrower will have to get a loan swiftly, with cheap interest rates in favourable borrowing terms.
Satisfactory credit score
Here, people have a decent chance of gaining loan approval because it shows the borrower as trustworthy and capable of repaying the loan. However, you may not be eligible for perks like cheap interest rates and favourable borrowing terms.
Moderate credit score
People have managed their loan payments and credit obligations in a justifiable manner. However, there is a high chance of rejection, and even if the lender offers them a loan, the terms and conditions will be unfavourable. The loan will almost certainly come with high-interest rates, a large down payment, and no advantage.
Bad credit score
People have minimal chances of getting their loan applications approved. The banks and financial institutes are very suspicious of people with bad credit scores. Here, people mostly fail to repay their loans on time.
Factors that impact CIBIL score
The CIBIL score determines a borrower’s creditworthiness. Banks and lending institutions consider the credit score of a loan applicant considering several reasons encompassing:
- Determining if the applicant is capable of repaying the loan
- To ascertain if the individual qualifies for the loan
- Assessing the credit balance and risk level of a profile
- Credit history and previous record
- Deciding the loan amount and the applicable interest rate
How to improve your credit score?
1. Balance ratio: Use only 30% of your total credit limit. However, you can increase your credit limit, but it is advisable to keep your credit usage low.
2. Keep your old accounts: Do not close your old accounts unless you have an excellent CIBIL score. As your CIBIL score is based on the duration of your credit history, cancelling unused accounts may lower your credit score.
3. Regular payments of bills: Set monthly reminders to pay your interest regularly to recover your CIBIL score. Keep money aside to pay your dues before or on the due date. You can opt for the standing order option, where your bank keeps paying your interest from your account regularly.
4. Avoid new credit: If you don’t have a financial emergency, do not borrow money. If you are overly dependent on credit cards, it will hamper your credit score.
5. Pay principal with interest: Pay a certain amount of your principal with interest. As your principal amount will go down, your interest amount will also start reducing.
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