Wonder why your bank loan application is being repeatedly rejected? The answer most likely lies with the CIBIL score, a data point most loan applicants have no clue about.
“Most people do not know that there is such a thing as a CIBIL score. They come in thinking that if they are currently earning enough, then getting a loan will not be a problem. Then they get upset when their loans are rejected because of a low score,” said an ICICI Bank manager, who did not wish to be named. Credit Information Bureau (India) Ltd. (CIBIL) is a credit information company licensed by the Reserve Bank of India .
“CIBIL collects and maintains records of an individual’s payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders, on a monthly basis. This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to lenders to help evaluate and approve loan applications,” the company says on its website. “All loan applications are based on a CIBIL score. This also creates a chicken and egg situation since you do not get a CIBIL score unless you have taken credit at some point,” Mr. Gaurav Chopra, co-founder of Indialends, told The Hindu .
There are a host of issues surrounding the credit score that consumers do not know about, Mr. Chopra explained. “People may know that their credit history is being tracked, but they don’t know there is a single score. They don’t know about the 750 limit. They don’t know that, if their loan application gets rejected, then that further lowers their score. They don’t know the various factors that affect their score.”
The ‘750 limit’, as confirmed by many banks and by CIBIL , means that banks will in most cases only give loans to borrowers with acredit score of 750 or more. The score ranges between 300 and 900. According to CIBIL, there are four main factors that affect your credit score. The most obvious of these factors has to do with your payment history. “Making late payments or defaulting your EMIs or dues (recently or consistently) shows you are having trouble to pay your existing credit obligations and will negatively affect your score,” says CIBIL.
In addition, consistently high utilisation of your credit limit on your credit card, and a resultant large balance in your current account, is likely to negatively affect you score.
The mix of your loans also makes a difference. “Having a balanced mix between secured loans (such as auto, home loans) and unsecured loans (such as personal loans, credit card) is likely to have a more positive affect on your score,” CIBIL says.
And finally, having many new loans or recently issued credit cards negatively affects your credit score as this suggests you are credit-hungry.
Several banks also confirmed that if an individual’s loan application is rejected due to the applicant having a credit score lower than 750, then that rejection lowers the score even more.
This may seem unfair, but it makes sense from the bank’s point of view, according to Mr. Sanjay Bhattacharya, a former managing director at State Bank of India.
“The CIBIL score is aimed at repeat defaulters. If a person with a low CIBIL score, which means that he is a repeated defaulter, asks for one more loan and is rejected, then his score will fall. The assumption is that he is trying to cheat,” he said.
There are several ways to improve the credit score. To start with, always make all your payments—including phone and electricity bills—on time and use credit conservatively.
The number of credit cards you carry significantly affects your credit score, said Mr. Chopra. The more cards you have, or the more card applications you make, the more credit-hungry you seem. “The best situation is to have a single credit card and to regularly spend on it and make the payments on time. Just that will get you a high CIBIL score,” he said.
Vigilance is also crucial. “Monitor your co-signed, guaranteed and joint accounts monthly. In co-signed, guaranteed or jointly held accounts, you are held equally liable for missed payments. Your joint holder’s negligence could affect your ability to access credit when you need it,” CIBIL warns.
