What is the Purpose of CIBIL Score?

Loans have been around for a long time. However, their popularity has grown only recently. Earlier, when people wanted to fulfil their life's needs, they approached things the old-fashioned way: they saved money and took the plunge when they had enough money saved to cover the costs involved. However, things have changed now. In this day and age, people do not want to wait and want to live their best life in their prime. Further, they have also grown more comfortable with credit and know how to handle it. Thus, from unsecured loans, such as car loans and personal loans, to secured loans, such as Home Loans, borrowers, these days, can maintain and handle a healthy mix of different types of credit easily. Further, loans have become cheaper and more convenient to repay. All these factors have increased the popularity of loans over the recent past.  

Unfortunately, with more and more people opting for loans, the cases of loan default have increased too. When borrowers fail to pay loan EMIs on time, lenders lose money. Thus, to prevent cases of loan default, borrowers set strict eligibility requirements that help lenders identify high-risk applicants and remove them from the process. These eligibility requirements revolve around age, citizenship, income, credit score, etc. The credit score is one of the key things that helps lenders identify and remove high-risk borrowers. In this article, we explain how. Further, we also discuss the importance of CIBIL scores and why borrowers must maintain a good CIBIL score if they want credit of any kind. 

What is a CIBIL Score?

In India, four credit information agencies are recognized by the Reserve Bank of India to collect information on borrowers and how they use credit. These are Experian, Equifax, CRIF Highmark and TransUnion CIBIL. These credit information bureaus collect information from banks, NBFCs and other financial institutions about credit users, such as how much credit a borrower has, how is their credit repayment history, how old is their credit history, the number of loan and credit card applications they made recently, etc. These details help credit rating agencies understand a borrower's behaviour towards credit and their ability to repay it on time. Based on all the information received, the credit information bureaus form a credit report and based on the information available in this credit report, they assign a borrower a credit score. A credit score is a three-digit number between 300 and 900 that reflects a borrower's creditworthiness. The higher a person's CIBIL score, i.e. closer it is to 900, the higher their creditworthiness and the better their chances of getting approved for a loan. TransUnion CIBIL is the most popular of these credit rating agencies and the credit score it assigns to borrowers is known as the CIBIL score. Borrowers who want to avail of a loan in near future must understand the purpose of CIBIL score or CIBIL score importance. Our next section discusses this in detail.

Also Read: Everything You Should Know About Your CIBIL Score 

Why is Your Credit Score Important? 

When a borrower applies for a loan, be it secured or unsecured, lenders pull out their CIBIL report to understand their creditworthiness. To be eligible for a loan, a borrower must have a CIBIL score of at least 750 - the higher their CIBIL score, the better.  

A CIBIL score of 750 and above is the mark of a borrower who pays their EMIs on time, has never defaulted on loan repayment, has a low credit utilization ratio and low existing debt and in general, handles credit efficiently. Therefore, lenders know that there is almost no risk involved in lending money to such a borrower. Therefore, when borrowers with such a credit score apply for a loan, lenders approve their loan application almost immediately. Further, since lenders decide the terms and conditions of the loan based on a borrower's CIBIL score, a good CIBIL score helps borrowers avail of a loan on highly beneficial loan terms and conditions.  

Here's why your credit score is so important and here is how it can prove helpful during the loan application process.  

- When your CIBIL score is 750 or above, lenders know that you can be trusted with timely repayment of loan money. Therefore, when borrowers with a good CIBIL score apply for a loan, lenders try to entice such borrowers with low-interest rates. Thus, a good CIBIL score helps borrowers avail of a low-interest rate, which in turn, helps them keep their EMIs low and affordable as well as keep the cost of borrowing on the lower side as well.  

Also Read: Tips to Maintain Your Business CIBIL Score Above 700 

- A good CIBIL score also gives borrowers high negotiating power. 

Lenders want borrowers with high repayment capacity as clients. Thus, when such a borrower applies for a loan, the lender allows them to negotiate the loan terms and conditions. Thus, the borrower can ask for a longer repayment tenor to make loan repayment easy and a higher loan sanction also. They can also ask for other favourable conditions, such as zero prepayment charges, etc. 

In conclusion, maintaining a good CIBIL score is important as doing so allows a borrower to get approved for a loan quickly as well as avail of the loan on beneficial loan terms and conditions. However, to be able to maintain a good CIBIL score, borrowers must have a thorough understanding of the factors that affect a borrower's credit score and factors that don't. Most borrowers have an understanding of the factors that affect CIBIL scores but there is a lot of confusion on this topic. Many borrowers consider certain factors highly important for their CIBIL score even when they do not matter at all. Let us clear the confusion and look at the factors that don't affect a borrower's CIBIL score. 

Factors That Don't Affect Your Credit Score 

Soft Enquiries 

One of the biggest confusions that people have is around soft and hard enquiries. When a borrower applies for a loan, the lender pulls out their credit report to assess their creditworthiness. This is known as a hard enquiry. As opposed to this, when a borrower checks their credit score, it is known as a soft enquiry. Too many hard enquiries are considered bad as they show a borrower to be credit-hungry. Further, too many hard enquiries also impact a borrower's credit rating negatively. This is not the case with soft enquiries. Borrowers can check their CIBIL score as many times as they like, and it will not affect their CIBIL score. 

Income 

When borrowers apply for a loan, lenders check their income to gauge whether they can afford to pay the loan they are planning to take. Since lenders check a borrower's income before approving a loan, many people think that a person's income also affects their CIBIL score. This is definitely not the case. While your income may have an indirect effect on your credit score (if your income suddenly goes down, you may find it difficult to honour your EMI commitments, which in turn, may lead to you missing a few EMIs, which in turn, will affect your credit score), it has no direct bearing on your credit score. 

Bank Account History

Your bank account and your loan account are entirely different. The balance you keep in your bank account and the payments you make through it have no effect on your credit history. Therefore, how a borrower manages their different bank accounts and the balance they maintain in these accounts does not affect their credit score. 

Utility Bills 

This is another common misconception that people have - not paying utility bills, such as your phone bill and rent, will cause your credit score to go down. Your phone and utility bill does not affect your credit score. As long as you pay all your credit card bills and EMIs on time, your CIBIL score won't be affected even if you miss paying your rent or phone bill. 

Debit Card Usage 

Yet again, it does not matter how you use your debit card. Your debit card is linked to your savings or current account and has no connection with your loan or credit card account. Thus, you can use your debit card however you like, it will have no effect on your credit score. 

Final Words

If you plan to avail of a loan in future, know that your credit score will matter. Your lender will check your credit score while deciding the terms and conditions of the loan. A good CIBIL score will help you avail of a loan on lucrative terms and conditions. It will also help you negotiate for a lower interest rate and a higher loan sanction. A low or bad CIBIL score, on the other hand, will make it difficult for you to avail of a loan. Even if your loan application gets approved, the cost of borrowing the loan will be too high. It is, thus, that borrowers must try their best to maintain a high CIBIL score. Maintaining a good CIBIL score is easy. Simply follow these tips:  

• Pay your credit card bills and EMIs on time. If you miss an EMI payment, clear it as soon as possible. A missed EMI payment affects your credit score when you do not clear it within 30 days of missing the due date.  
• Maintain a healthy mix of secured and unsecured loans. A healthy credit mix boosts an individual's CIBIL score.  
• Do not close old loan accounts. Old loan accounts increase the age of your credit history, which directly affects your CIBIL score.  
• Never exhaust your credit cards. Doing so would increase your credit utilization, which in turn, will affect your CIBIL score negatively. Paying only the minimum amount due on your credit card each month will also do the same. So, clear the entire amount due on your credit card each month and not just the minimum amount due.  
• Never settle loans. Try and pay them as agreed between you and your lender at the time of the sanctioning of the loan.  
• Lastly, check your CIBIL report for errors at least once every six months. If you see any errors in your CIBIL report, report them immediately. If your CIBIL score has gone down to an error in your credit report, reporting the error will help you mend your CIBIL score.  

Maintaining and improving your CIBIL score is both important and easy. We hope the information provided in this article will help you do both.