October 22, 2024 · 11 mins read
Santosh Kumar
A vacation trip to your dream location, owning a house you have dreamt of, renovating your home to make it your dream land or joining the course you are passionate about- whatever the scenario is, you need money to accomplish it, right? What if you don't have that lump amount? A personal loan is one solution to avoid waiting for years to make your dream come true. If you can manage to pay back the loan in monthly instalments, then personal loans are a great way to fulfil your dreams and passions.
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A personal loan is the type of loan offered by financial institutions and banks to meet your legitimate financial needs. Personal loans can be secured or unsecured. For borrowing, a secured personal loan requires some type of collateral, be it a cash asset like a fixed deposit or a physical asset like a house or car. But in an unsecured personal loan, you need not require collateral. So how do they verify whether you can repay the loan back when they have nothing assured to compensate for your default payment? The answer is they check your creditworthiness; only if satisfied they will sanction the personal loan, and the CIBIL score or credit score is the tool they use to check your creditworthiness. Here is a complete guide on what the CIBIL score is, how much CIBIL score is required for a personal loan and much more for those looking for a personal loan.
Usually, banks and financial institutions report the credit activities of their customers to the credit bureaus. Based on our credit activities, the credit bureaus will give a three-digit score ranging from 300 to 900. The credit score given by the Credit Information Bureau (India) Limited is called the CIBIL score, which gives a score to rank our creditworthiness regarding the repayment of loans and credit bills.
The CIBIL score is calculated based on various factors like payment history, credit utilisation, credit length, credit mix and recent credit inquiries. Payment history gives a clear idea about how good you are at repaying the credit bills on time; credit utilisations depicts how much you are dependent on credits for your financial needs; credit length gives enough data for the bureaus to calculate the score and credit mix indicates how good you are at handling various types of credits. A credit inquiry is when lenders check your credit score when you apply for a loan or credit product, which negatively impacts the score.
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As already mentioned, the CIBIL score ranges from 300 to 900. Let us see the impact of various CIBIL score ranges on the personal loan approval process.
1. Excellent score range- 750 to 900
2. Good score -650 to 750
3. Average score- 550 to 650
4. Poor score- 300 to 550
If you are a newbie to credit and have never taken any loans or credit cards, then you may have an NA score. In this case, the banks or financial institutions may not have solid proof to decide whether to approve the loan. So, they may consider your income or collateral to get your loan approved.
Lenders and banks will reject your loan application when your score is poor. A poor score indicates that you are not responsible for repaying your credit bills, and that makes the lenders decide not to approve your loan. You will have to improve your score before applying for a personal loan. With a poor CIBIL score, if you repeatedly apply for a loan, the loan application may get rejected and parallel, increasing the hard inquiries and further pulling down your CIBIL score.
An average score is also a sign that you should take steps to improve the score value. It is the consequence of any missed or delayed payment in the past. Banks and lenders may reject your loan application. Even if your loan gets approved, the interest rate may be high or the loan amount may be low or both.
A good score is a sign that you are responsible for repaying the credit bills. Lenders widely accept a good score in this range, and the loan approval process will be quick and easy. Moreover, lenders will approve larger loan amounts and lower interest rates.
An excellent score proves your creditworthiness and your capacity to handle various types of credit. With an excellent score, lenders may be ready to offer you higher loan amounts and better interest rates. Since your creditworthiness is excellent, the lenders may consider your request even if you negotiate for lower interest rates.
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Checking your CIBIL score once in a while to ensure you are within safer limits is a good practice. Here are the steps to check yours.
1. Visit the CIBIL website.
2. Click 'Get Your CIBIL Score'.
3. You will have to fill in some basic details about you.
4. Attach an identification document.
Maintaining a good CIBIL score has many benefits when you apply for a personal loan. 1. Larger Loan Amount: As the lenders are assured of your creditworthiness, they may be ready to offer you a larger amount.
2. Lower Interest Rate: Lenders fix interest rates based on your CIBIL score. The more your score is, the lower the interest rate will be.
3. Easy and Fast Approval: Since the lenders and banks have a clear idea that you will repay the amount, they will easily approve the loan application. On the other hand, if the CIBIL score is low, you will have to provide collateral.
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Your CIBIL score is updated frequently, usually on a monthly basis. So, even if your CIBIL score is low, take steps immediately to improve it. Here are a few simple measures to increase your score.
Missed or partial payments are the top factors that decrease your credit score. So make sure to make payments on time. Automate the credit bill payment process or set reminders to ensure you pay on time. Also, reserve some amount beforehand the previous month itself to avoid missed payments due to shortage of money.
Late payment is equally damaging as missed payments and is a sign that you are not showing much interest in repaying your credit bills. The credit score will decrease drastically with late payments. The more you delay the payment, the more your score will decrease. So, schedule your payments based on your financial status and automate the payments. Also, set reminders to ensure that you have paid the bills.
Over-utilisation of credit products is another factor that negatively impacts your CIBIL score. So make sure you never use your credit cards to the fullest limit. 30% usage is a fair deal, according to experts. So, plan wisely to ensure low credit utilisation to amp up your CIBIL score.
Utilising various types of credits is a positive trait to boost your CIBIL score. So, if you have a bulk purchase, you can opt for a loan instead of paying ready cash or waiting to save money if it fits your budget. With a strong mix of various credits, you can prove that you are good at handling different financial situations wisely.
Make sure to take a loan only if it is within your budget. Also, credit mix has the least effect on your CIBIL score. So, considering loans or credit products just to improve the CIBIL score is not advisable.
Each time you apply for a loan or some credit product, the banks, financial institutions or lenders will check your credit score, which is called a hard inquiry. Multiple hard inquiries show that you are in some financial crisis. Also, it will bring down your credit score. So avoid multiple credit applications simultaneously and opt for upgrading your existing credit account if required.
Having a longer duration credit history allows lenders to assess your credit behaviour for a longer duration. So, if you have an old credit account with a good repayment history, try to downgrade the account to keep it active and improve your CIBIL score instead of closing it.
Not only your loan repayment behaviour will affect your CIBIL score. The loan repayment behaviour of the loan for which you co-signed will also have an impact on your score. So before co-signing for a loan, assess the financial responsibility of the one for whom you are co-signing to stay safer.
Wrong information like an invalid phone number or wrong address in the credit report will also make your report suspicious and hence, you may have a lower credit score. Similarly, any wrong information about your repayment or unsolved query will also affect your score negatively. So make it a habit to frequently check your credit report and if you find anything wrong and doubtful, report it to the appropriate authorities as soon as possible.
Your credit score is not a fixed value and keeps changing from time to time based on your financial activities. So, keep an eye on your credit score and if you find the score is starting to fall, take steps immediately to boost the score. Make sure to maintain a healthy score of above 650 all the time to be ready to avail of credit products as and when required.
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Personal loans are key to financially supporting you to make your dream come true without delay and a good CIBIL credit score is the key to easily and quickly availing personal loans. So make sure to always maintain a healthy CIBIL score so that you can be ready to avail of personal loans when a dream hits you or some financial emergencies occur. For the newbies, start your credit journey now so that you will not have a NA CIBIL score when you need a personal loan.
Why do lenders check my CIBIL score for approving my loan?
CIBIL score is a rank given to your creditworthiness based on your past credit behaviour. Banks and lenders check your credit score to make sure that you will repay the amount you borrowed.
How much credit score is required for a personal loan?
A score of more than 650 is usually considered a good score.
Do banks check for CIBIL scores for salaried people?
Yes. The credit score is proof of how good you are at repaying your credit bills. A good salary is a sign that the customer has the financial base for repaying the bill or loan but that doesn't mean they are responsible regarding repayment of the credit bills.
Do all lenders have the same CIBIL limit for approving personal loans?
The banks or lenders may give a small deviation based on other factors like income or collateral.
My bank rejected my personal loan application as my credit score was low. Can I apply to other banks?
It is recommended not to do that. Usually, all lenders will consider the credit score and there are more chances that your loan may get rejected multiple times. Also, each time you apply for a loan, and the lender checks your CIBIL score, it becomes a hard inquiry which will further damage your score.
How can I get a personal loan if my CIBIL score is low?
If you immediately need the loan, you can apply for a loan with collateral. If you can wait for a few months, you can try to improve your CIBIL score to a safer limit and apply for the loan.
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