A CIBIL (credit) score is a 3- digit numeric summary that is calculated by credit bureaus to determine your credit- worthiness. It is also considered as one of the most important factors during a personal loan and credit card approvals. CIBIL (Credit Information Bureau, India Limited) is one out of 4 bureaus in India (rest are Experian, CRIF High Mark and Equifax) that are authorized by RBI and are responsible for evaluating your credit score.
The value of a credit score ranges from 350- 900 and depends on the information provided by banks and NBFCs. A good credit score of 750 and above reflects a good credit history and indicates that you are reliable and credit worthy. A poor credit score on the other hand is likely to lead to rejection of your loan application or higher interest rates.
Why is a CIBIL Score Considered Important to Avail a Personal Loan?
A personal loan is an unsecured loan that is used to deal with various personal situations like a medical emergency, wedding, vacation, home renovation, etc. Since it is an unsecured loan and no collateral is required, the lenders need some guarantee to know if an individual is capable enough to repay the loan on time. CIBIL score works as a reflection of your past repayments and helps the lender to decide if you are creditworthy.
How is CIBIL Score Calculated?
The following factors are taken into consideration while calculating your CIBIL score:
- Repayment history: Past debt payment record gets the maximum weightage as compared to the other factors. It is important to ensure timely payment of EMIs of your personal loan and credit card dues as all the lenders closely examine your past repayment history to know how you will repay in future. If you are indisciplined with your EMIs and credit card bills, your credit score goes down. Also, make sure that the repayment information mentioned in your credit report matches with the information of your credit card statement or loan account as even a small piece of wrong information can lead to a rejection of your loan application, even if your credit score is good.
- Credit mix: Credit mix is the ratio of your secured and unsecured loans. An individual with more number of secured loans like gold loan, car loan, home loan, etc. is preferred by the lenders when it comes to approving a personal loan and bureaus also give high credit scoring to such individuals. In order to have a healthy mix, you may need, you can prepay your unsecured loans like a personal loan or credit cards. Not only this, you can also maintain a perfect credit mix by replacing your unsecured loans with secured loans like gold loan, top- up home loan (only in case of an existing home loan), etc.
- Debt to income ratio: A debt to income ratio refers to the ratio of your monthly gross income and debt expenses. This ratio helps the lenders to determine your ability to manage monthly EMIs along with the other expenses. Let’s say, if your gross monthly income is Rs. 58,000, you have taken a home loan with monthly EMI of Rs. 35,000 and there is a personal loan EMI of Rs. 6,000, you will be only left with Rs. 17,000 to deal with the other expenses. In such a case, more than 50% of your income goes in paying the EMIs and hence the lenders are unlikely to consider you for another loan.
- Credit utilization ratio: Credit utilization ratio is the ratio of your credit card limit and total outstanding amount. All the lenders prefer to lend a personal loan to those with a credit utilization of 30% or less as an individual with high credit utilization seems to be credit hungry and is more likely to default with his repayments in future. Let’s say, your credit card limit is Rs. 1 lakh and you utilize Rs. 70,000 to Rs. 75,000 every month. Therefore, your ration comes out to be more than 50%. In such a case, bureaus can reduce your credit score. If you are breaching the 30% mark on your credit card every month, either ask the bank to increase your credit card limit or get a new credit card.
What Are the Reasons for a Low CIBIL Score?
Your CIBIL score gets badly affected due to the following reasons:
- Inquiring about multiple loans and credit cards at a time: Whenever you apply for a personal loan or a credit card with any lender, he will see your credit report to check if you are credit worthy or not. Such an inquiry is called a ‘hard inquiry’ and each of such inquiries takes your credit score down by a few points. To avoid such a situation, you can visit Paisabazaar.com and here you can compare all loan and credit card options available to you and choose the most suited one. Additionally, you can check and track your credit card from Paisabazaar.com at absolutely zero cost. When an individual checks his credit score, it is known as a ‘soft inquiry’ and it does not affect your credit score in any way.
- Delayed or missed repayments: If you regularly miss your monthly EMIs or there is any delay from your side while paying your credit card bill, your credit score will drop. The lenders will also not like your indisciplined behavior and may not consider you for a loan in future. Therefore, never borrow more than your repayment ability and always pay your EMIs and credit card bills in full on time.
- Errors & fraudulent activity: In case your credit report has any errors, like a mismatch in your name, address, PAN etc., lenders may reject your personal loan application. There may also be credit activity against your name in the credit report, which you may not have done. This may happen due to an error by the bank or the bureau or due to a fraudulent activity that has taken place in your name. This may bring your credit score down. Thus, it is important to review your credit report regularly and report the errors to the credit bureau immediately
- Credit mix: As mentioned above, a credit mix is a proportion of your unsecured and secured debts. A borrower with more number of secured loans like car or a home loan is preferred by the lenders. If you have a more number of unsecured loans like a personal loan or credit cards, you are not considered credit worthy. To maintain a healthy credit mix, try to prepay your unsecured loans and increase the number of your secured loans. You can also replace the unsecured loans with secured loans like gold loan.
What are The Tips to Get a Personal Loan Despite a Low CIBIL Score?
You have a low credit score and you cannot wait till the time it gets improved because there is a financial emergency. What do you do in such a case? Just read the follow steps and follow them:
- Income: If you have high income and a low credit score, you may be in a position to repay the loan on time. You can ask the lender to consider it for a personal loan by submitting adequate income proof. In some cases, the lender may be convinced to offer you the loan, basis your income, though the rate of interest is likely to be comparatively higher.
- Go for a lower personal loan amount: There will be less risk involved from the lender’s side if you ask him to lend you a lower amount. In such a case, the lender might agree to lend you a personal loan if the loan amount is not significant.
- Know about the tie- up between your employer and the lender: If you are working for a reputed MNC or a public sector organization, the lender may accept your loan application, basis your stable job and good reputation of your employer.
- Consider NBFCs and digital lenders: There are a few NBFCs that offer a personal loan with a low credit score by charging a higher interest rate. You can visit Paisabazaar.com to know about such NBFCs and compare their interest rate. Also, there are many digital lenders that offer personal loans to those with a low credit score. However, the rate of interest offered by these digital players is much higher.
- Apply with a co- applicant: In case of a low CIBIL score, you can apply for a personal loan with a co- applicant like your spouse or parent. If your co- applicant’s CIBIL score is good and he meets the eligibility criteria, you may get a personal loan without any hassle. In case your low credit score is still a problem, you may consider taking a loan in your spouse or parent’s name.
A good CIBIL score is mandatory to avail a personal loan but the above mentioned points might help you to get a personal loan irrespective of the CIBIL score. However, to avoid such a situation regularly check your credit score and work to build it over time, so that it acts as an advantage and not a roadblock, when you apply for a personal loan.