Does Loan Rejection Affect Your CIBIL Score?

A Home Loan can be a convenient financial option for aspiring homebuyers who wish to purchase a property. Applying for a Home Loan and availing of it at favourable terms require you to meet your lender’s eligibility criteria, which typically include your income, age, employment tenor and type, and credit score. Having a stable income and a high CIBIL score can increase your chances of being approved for a Home Loan.  

Understanding CIBIL Score 

Credit information bureaus, such as TransUnion CIBIL, collect information on credit users from various financial institutions to understand the user’s creditworthiness and repayment capacity.  

After analysing the data, they assign a credit score to each user. This score, a three-digit number between 300 and 900, reflects how well a borrower manages loan repayments and helps lenders assess the risk of lending funds. A high score, typically between 750 and 900, indicates strong creditworthiness and repayment ability.  

A low credit score, on the other hand, depicts low creditworthiness. Borrowers with lower scores may face loan application rejections. Therefore, it is advisable to maintain a high credit score if you are planning to apply for a loan.  

How Does a Loan Rejection Impact an Individual's CIBIL Score?

When you apply for a loan, your lender assesses your CIBIL score. If you have a high CIBIL score, your chances of being approved for a home loan increase, provided other factors, such as age and income, are satisfied. However, if your CIBIL score does not meet the lender's qualifying criteria, your application may get rejected. So, how does a loan application rejection affect a person's CIBIL score?

When a lender enquires about your credit profile, the enquiry gets registered as a hard enquiry. On the other hand, when you check your CIBIL score or CIBIL report, the enquiry gets registered as a soft enquiry. Soft enquiries may not affect your CIBIL score but hard enquiries do. Several hard enquiries can reduce your credit score and showcase you as a credit-hungry borrower. If your loan application is rejected, it is better to assess the reasons behind the decline in your CIBIL score rather than applying with another lender, which would lead to another hard inquiry. 

​​Here is How to Improve Your CIBIL Score

If your CIBIL score does not meet your lender's qualifying criteria, here are a few tips on how you can improve it and increase your chances of loan approval:  

• Your repayment history is one of the key factors that affect your CIBIL score. To improve your CIBIL score, build a neat repayment history with no instances of missed or late EMI payments. You can set up reminders or authorise your bank to clear your EMIs before the due dates.  
• If you have been rejected for a loan application recently, do not apply for another loan immediately. Instead, improve your credit profile and apply for a loan after a sufficient gap, to reduce the number of hard inquiries.  
• Your credit utilisation ratio is another important factor that affects your credit score. A high credit utilisation ratio indicates a high dependency on credit. Keep your credit utilisation ratio under 30% and clear the entire amount due on your cards each month.
• Lenders prefer borrowers who have handled both secured and unsecured loans. Thus, borrowers who have a healthy mix of both types of loans have a high CIBIL score. 
• Check your CIBIL report for errors and inaccuracies as they may lead to incorrect credit information. If you spot any, apprise CIBIL immediately. 

The CIBIL score plays a key role in loan approval. If you are planning to apply for a Home Loan, assess your credit score and improve it if required to increase your chances of approval.