A Detailed Guide to Help You Understand CIBIL Score and Its Importance

When you apply for a home loan, one of the first questions your bank or lender will ask is, “What is your credit score?” Here is a detailed guide that will help you understand the importance of a credit score in your loan approval process.

What is a credit score?

The Indian banking and financial system has become more elaborate over the years, but with digital systems and authentication mechanisms in place, it is now easy for a lender to look into your credit history and financial hygiene before deciding to approve any line of credit. This could include loan approvals or providing you with a credit card. So how do banks and NBFCs get to know your financial history? This is through your credit score. Credit bureaus or agencies collect financial data and analyse the details to arrive at a credit score. These agencies could use data from active and repaid loans, default history, credit card information, and even your history of paying utility bills on time. With all this information, they prepare a credit report that encapsulates the risk for any lender who loans you money or offers you credit. Of the different credit bureaus in India, TransUnion CIBIL Limited is the oldest and most popular.

Your CIBIL Report

The CIBIL Report, published by TransUnion CIBIL Limited, is a complete summary of a person's credit health and worthiness. This is reflected in the three-digit credit score that ranges between 300 and 900. Your CIBIL score reflects your credit practices and indicates your likelihood of repaying the loan on time.

Your CIBIL Report takes into account your credit limits and credit utilisation ratios. If you have a credit card, you are usually provided with a credit limit. How much of this limit you utilise every month influences your credit score. The repayment history is factored in if you have outstanding loans or loans that have been previously paid off. So, any delays in paying the EMI or any default on your part will negatively reflect on your CIBIL score. Having multiple loans running puts you at greater risk of default. This is also considered when your CIBIL score is calculated. Several other macro and micro data points are considered in your credit report.

Why is your CIBIL Score important?

Most banks and financial institutions place a great deal of importance on your CIBIL score when it comes to approving loans. This is particularly true of home loans or housing finance. Most lenders consider a CIBIL score of 750 to be low risk. This means that if your credit score is over 750, this greatly increases the likelihood of your home loan being approved by the bank or NBFC. A higher CIBIL score can also give you advantages like a longer tenure or lower interest, depending on the bank's policies. Maintaining a high CIBIL score can also help you get quicker loan approvals, get a higher credit limit on your credit card, and help you get pre-approved loans.If you plan to apply for a home loan, you may want to build up a good CIBIL score to increase your chances of approval.

Checking your CIBIL Score for free

Before we understand what we can do to improve the CIBIL score, let us see how you can track it.Your CIBIL score is updated every month and encapsulates nearly 36 months of credit history. It is updated every month. You can apply for one free credit report from CIBIL every year. Apart from this, when you apply for a credit card, home loan, or any other form of debt, the bank or NBFC will seek a credit report from CIBIL. It is important to remember that multiple queries by different lenders within a short time span can, in fact, lower your credit score. Therefore, it is a good idea to check your eligibility, compare various products, and settle on a lender rather than apply to several financial institutions at once. Apart from the free report, you can also buy a copy of your CIBIL report and score from their official website for a fee.

Improving your CIBIL Score

• Start early - Building up a good credit score can be a long process. Building healthy credit practices can go a long way in maintaining a good credit score.
• Pay dues on time - Always pay your EMI dues and credit card bills on time. A delay in payment will cost you interest and tank your credit score.
• Keep your credit utilisation low - Use only as much credit as you require, even with a high credit limit. Do not apply for several credit cards or loans at the same time.
• Keep track of the loans you have co-signed - If you have been a guarantor for a loan or co-signed a loan, the repayment history could reflect in your credit score.
• Monitor your credit mix - Keep a healthy mix of secure and unsecured loans.
• Check your bills – Check your credit report and credit bills regularly. Any frauds or scams could adversely affect your credit score and should be promptly reported.

Your CIBIL score is one of the most important eligibility criteria for your home loan approval. It is a good idea to start building up a good credit score before you decide to apply.