September 13, 2024 · 11 mins read
Santosh Kumar
One of the significant benefits of high CIBIL score is the lower rate of interest you will get for the credit line you applied for. Any type of loan or credit will always come with an interest rate. Simply put, an interest rate is a certain additional percentage of the borrowed amount paid to the creditor every month. They exist to make up for the cost of loaning money to an individual over time.
This cost arises due to inflation, so financial institutions need to protect themselves against it. The debtor is expected to pay this extra amount because they get to access a desired amount immediately instead of waiting months or years to save up for it themselves. Interest rates apply to different types of loans such as home, auto, personal, etc. and credit card bills as well.
In this article, we will first look at how the CIBIL score is decided for an individual. We will then explore the link between a good credit score and a low interest rate. The advantages of having a high CIBIL score can only be accessed if we cover how to increase CIBIL score, which will be seen in the last section.
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TransUnion CIBIL, which stands for Credit Information Bureau of India Limited, is the oldest functioning credit bureau in India, started in 2000. It holds the credit information of around 60 crore Indians and approximately 3.2 crore businesses. It issues a CIBIL report and score to each consumer, which contains a person’s entire credit history.
Someone with access to your Credit Information Report (CIR) will be able to view the types of credits you hold (cards, loans, etc.) and your payment history for the last 3 years. The CIBIL score is a number which represents your trustworthiness from the perspective of a lender. Varying from 300 to 900, the CIBIL score is the first aspect that gets checked when you request to borrow money.
Read More: How To Read Your Credit Report
There are numerous factors influencing the calculation of the CIBIL score. They can be broken down as follows:
1. Repayment History – The largest factor impacting the credit score, making up 35%. It represents your ability to make payments in a timely manner. Successfully maintaining a history of up-to-date payments will prove to a creditor that you are good at managing your finances.
2. Credit Utilisation Ratio (CUR) – The proportion of your credit usage to the total credit available. It is the second largest factor, accounting for 30% of the CIBIL score. You should aim to keep your CUR below 30% in order to have a good credit score.
3. Credit History Length – Making up 15% of the score, this is the time over which you’ve had a credit history. A greater length means a higher score and the more likely that a lender will trust you.
4. Mix of Credit – Also covering 15%, this is the type of credit you have in your current portfolio. A good blend of auto loans, credit cards, home loans, etc., is a good sign of your ability to manage different credit lines simultaneously.
5. Number of Hard Enquiries – The smallest factor, making up 5% of the CIBIL score. A hard enquiry shows up when a lending institution pulls your file after you put in a credit request with them. They negatively impact CIBIL scores, so it is better not to apply for multiple credit types simultaneously.
There are several benefits of good CIBIL score in India, which will be explored in the following sections. A generally good CIBIL score is considered to be in the 700+ range. A satisfactory score is 650, while anything below 600 is deemed poor.
Read More: CIBIL Score Role in Loan Application Process
The interest rate is not a fixed number for everyone who applies for a loan. It is decided by financial institutions according to an individual’s financial history. The CIBIL score plays a crucial role in determining the interest rate set for a person. As mentioned before, one of the biggest advantages of a good credit score is lower interest rates on loans. Based on the factors outlined above, a good credit score (like 750 and above) is an indicator of a low-risk borrower.
Lenders like to see this because you are less likely to default on your payments. Conversely, a low credit score (below 550, for example) shows a history of bad financial management. A lender will be very hesitant to let you borrow money in the first place, let alone offer you favorable loan terms. It has been reported that scores of 500 or lower may have interest rates of 30% on the off chance that loans are even granted.
Credit trustworthiness is not the only thing indicated by a good CIBIL score. It also shows that the borrower is savvy with finance management (less overspending by keeping their CUR low). If they have a good credit mix and history length, then they are also capable of handling several credit lines at once and maintaining a good payment record over a long period of time. Lenders offer other benefits of high CIBIL score to those who qualify. There is greater bargaining power associated with a good credit score, which greatly increases your chances of loan approval. It is often stated that there is much less paperwork involved for those dependable borrowers who have requested a loan– another advantage of having a high CIBIL score. This is usually accompanied by lower waiting times for loan approvals as well.
How much lower can the interest rates of someone with a good CIBIL score be compared to someone without? The value varies between lending institutions and also differs according to the type of loan that was applied for. It is safe to say however, that in general, the benefit of a high CIBIL score will be 0.5-2% lower interest rates. As an example, Punjab National Bank charges an interest rate of 8.95% for CIBIL scores above 750. At the same time, they charge 9.45% to those with a score below 700. Both figures are for home loans up to Rs. 30 Lakh. The differences in these percentages actually mean a lot in the long-term, as the lower interest rates lead to significant savings over the years. An added benefit of a high CIBIL score in India is higher loan approval rates. CIBIL itself states that those with scores over 750 have a 79% approval rate for loans and credit cards.
The benefits of high CIBIL score do not have to be reserved only for those with good credit scores. Gradually increasing your score will allow you to access greater perks like lower interest rates. So, let’s delve straight into how to increase the CIBIL score through trialled methods.
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There are a multitude of ways to increase your CIBIL score. A combination of them will give you the best results in shorter spans of time:
1. The most definitive way of increasing your score is to make your loan and credit card bill payments on time. Nowadays, there are automated systems provided by financial institutions on apps or websites that allow users to make timely payments. Other systems, such as reminders, are also recommended for staying on track. Whatever happens, make sure never to default on payments, as these will stand out on your credit report to any lender that assesses it.
2. Keep your credit utilization ratio ideally below 30% by not overspending and maintaining your finances well. Over time, you need to develop the mindset that good financial health is the most important thing. When a lender sees a history of low CUR and rewards you for it, you’ll be able to access the best benefits of high CIBIL score.
3. Start your credit-building journey as early as possible. A long history of credit handling is the fundamental way to increase your CIBIL score. Rethink before you cancel an inactive card. While, on the one hand, it allows you to avoid unnecessary fees, it also lowers your CUR and credit history duration.
4. A good mix of credit in a portfolio is a trademark of people with good CIBIL scores. So, when you start planning your finances, it is important to consider obtaining a few types of loans and cards to show that you can manage your finances well.
5. Don’t apply for multiple credit cards or loans at once to prevent hard enquiries from showing up on your credit report and decreasing your score. So, while it is essential to have a good mix, you will need to plan your credit applications to ensure they are well spaced out.
6. A general way of increasing your CIBIL score is by monitoring your credit report and score. You can access both of these through the CIBIL website for a fee, but there are also other institutions that allow you to check for free. CIBIL allows one free check per annum. There is a common misconception that checking your own score will lower it, but this has been disputed many times. Checking your report regularly can help you plan ahead for the future and also spot fraud, which you can then report.
Now that you know how to increase the CIBIL score, it is up to you to stay consistent and prioritise keeping good financial habits so that you can obtain the advantages of having high credit score.
Read More: How Credit Card Usage Makes or Breaks Your Credit Score?
It should now be clear that a lowered interest rate is a major benefit of a high CIBIL score. This applies to all sorts of loans and credit cards, though the exact values differ across banks, types of loans, and the amount invested. Generally speaking, reductions of up to 2% can be expected for those with a good CIBIL score of 750+, resulting in exceptional savings over the years.
The advantages of having high credit scores rise with CIBIL scores. There are several ways to increase your CIBIL score, such as consistency in repayments, maintaining your card balance, and having a good mix of credit, to name a few. Maintaining a good credit score requires discipline and responsible spending habits. Building up these habits can be done over time with a positive mindset, and soon, you, too, will find yourself enjoying the benefits of high CIBIL score.
What can be regarded as a good credit score?
Generally, scores above 700 are considered good, but for getting lower interest rates on your loans, a score of at least 750 is needed. The lowest interest rates go to those with scores of 850+.
Why do we need to pay interest rates?
It is the price you pay for requesting a sum of money and receiving it within a few days or weeks instead of saving up for months or years. Banks charge interest to account for inflation over time.
Can people with low CIBIL scores receive loans?
It depends on how low the score is. If it is around 550, you may be able to secure a loan with a very high interest rate (around 25-30%), which is unideal. Besides the high interest rate, there are other disadvantages – low scores usually involve more paperwork and longer approval durations. Scores below 500 will probably not even get considered by the lender as it signals a history of awful finance management.
Does cancelling inactive credit cards decrease CIBIL score?
It has the potential to. It will lower your CUR (as your overall credit limit will decrease). It will also shorten your credit history and affect your credit mix. So always weigh your options before making such a decision.
Will my CIBIL score reduce if I check my credit report?
No, it will not. It is actually recommended that you check your score and report periodically to make sure everything is up to scratch.
How often should I check my CIBIL report?
Once or twice a month is probably enough. You can purchase a subscription to do this from the CIBIL website or access it for free from another financial institution if that is something they offer. After creating a membership, you are entitled to one free check per year through the CIBIL website.
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