Have you checked your CIBIL score recently? If you have ever applied for a loan or a credit card, your financial service provider has definitely accessed this magic three-digit number. So, what’s so magical about it? Well, for starters, this number reveals how much money you can borrow and how good you are at repaying loans.
In some cases, it may also help determine the rate of interest for your personal loan. But, the important thing to keep in mind is that your CIBIL score is an intangible part of the loan process. You cannot apply for a loan without a CIBIL score. Then again, you cannot improve your CIBIL score if you don’t take a loan.
What is CIBIL Score?
It’s more than just a three-digit number, rest assured. The word CIBIL is basically used to represent the Credit Information Bureau Limited (India). It is a credit information organisation licensed by the Reserve Bank of India. They maintain credit files of millions of individuals and businesses across India. This score is a numeric summary of your credit history and it ranges from 300 to 900. Your credit rating gets better the closer you get to 900.
By credit history, this score refers to a person’s ability to repay their debts. It keeps a track of their borrowings across all financial agencies and how they are repaying these loans. The calculation of the CIBIL score is based on a mathematical algorithm to determine your creditworthiness.
CIBIL Score and it’s Effect on Personal Loan Approval
The CIBIL score plays an important role when it comes to taking loans. So, it is completely natural that when it comes to a personal loan, the role of this score becomes crucial. Personal loans do not require any collateral. Due to the unsecured nature of this loan, lenders often rely on your credit score to ensure that the loan gets repaid.
One of the most important aspects of this score is your credit history. While calculating, 30% of weightage is assigned to how you have dealt with past debt. Have you paid your loan back on time? Did you remember to make timely payments of installments? If you did, then chances are you have a good score. This means you are reliable and creditworthy, so there is a high chance you will get a personal loan easily.
On the other hand, if you were not particular on sticking to your repayment plan for a past loan, that will be reflected by your score. More importantly, defaults and delayed payments might seriously affect the chances of getting any future loans.
The ratio of your total outstanding loan to the credit limit you have is your utilisation percentage. The lower you keep this percentage, the better off you will be. If you increase the current balance on your credit cards or default a couple of loan payments, your utilisation percentage will increase. This simply means that you are getting burdened by debt. It affects your credit score in a negative way and in turn, it might hinder you from getting a personal loan.
Competitive Interest Rates:
Any unsecured loan come at a high interest rate. Your CIBIL score holds the power to lower the interest rate for a personal loan. If you have a good credit score, you have the chance to get the loan at a lower rate of interest. Since you have a good score, lenders consider you a good borrower. Sometimes, the processing fees and other pre-payment charges are completely waived off when you have a good score. However, if you have a low score, chances are you will be charged with a higher rate of interest because you have no way to prove your creditworthiness.
Banks and financial institutions have the final say when it comes to the amount of loan that you can borrow from them. For example, you might need a loan of INR 2 lakhs. But, the bank ends up approving a loan worth only INR 80,000. Why does this happen? Well, if you want to take a personal loan, the entire amount of loan that you are applying for will depend on your CIBIL score. A high score will ensure you get the entire amount you have applied for or as much as possible. Lower scores translate to lesser amounts of loan.
Moving Forward & Making Yourself Loan-Worthy
It’s important that you consider improving your credit score as much as possible. Life is unpredictable and you don’t know when you might need to apply for a personal loan. The better your CIBIL score is the higher your chances are for a loan that suits your pocket. According to a survey done by CIBIL, 74% of Indian consumers check their credit scores twice in a year at the very least.
Once you have a satisfying credit score, consider applying for an online personal loan to further build your credit history. Nowadays, it is much more convenient if you opt for a loan online instead of a bank. In fact, online fintech companies grant personal loans to borrowers with lower CIBIL scores or without credit history as well. So, you can take advantage of what they have to offer to improve your credit score and profile.