October 2, 2024 · 12 mins read
Santosh Kumar
Financial difficulties are part of life and can occur at any time. Unexpected medical emergencies, sudden job loss or even expenses like building a house or starting a business can throw you into financial hardship. In such a situation, you will be under stress, and to navigate through the issue, you may plan to take a loan or consider getting a credit card to meet your financial needs. But what if the bank rejects your loan or credit card application? It will add more fuel to your stress, right?
Banks and lenders may reject your application for credit products for many reasons, but a low CIBIL score is the most important one. Your CIBIL score is the factor that proves your creditworthiness and makes lenders believe that you are capable of repaying the bills.
Whether you are hearing the word CIBIL score for the first time or need a tutorial to deeply understand the ins and outs of CIBIL score and ways to improve it, this is for you.
Firstly let us understand what is cibil score and what is cibil score for loan. CIBIL score is a score given to individuals by The Credit Information Bureau (India) Limited, i.e., CIBIL, to rate your creditworthiness. Usually, banks and lenders report the financial activities of their customers to one or more credit bureaus. When you contact any bank or lender to apply for any credit-based products, the lender will check your credit score to get a clear picture of your repayment possibility. The credit score ranges from 300 to 900, and a score of 650 or more is usually considered good. Sometimes, you may get a NO CIBIL score if you have never taken a loan or used credit cards. Below is the range of scores and what they signify.
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1. Excellent CIBIL Score: 750-900.
2. Good CIBIL Score: 650-750
3. Average CIBIL Score: 550-650
4. Poor CIBIL Score: 300-500
CIBIL score is calculated by considering various factors like payment history, credit exposure, credit type and duration.
specifies how well you are at promptly paying back your credits. Timely debt payment will help you have a good payment history and, therefore, a better CIBIL score.
signifies how much you depend on your credit to handle your financial burden. Financial experts recommend using credit cards up to 30% of the credit limit.
It signifies how good you are at handling various types of credit. You can opt for various credit products to build up this factor. That doesn't mean you should opt for credits more than your budget.
With a longer credit duration, credit bureaus will have sufficient data to score your creditworthiness. So start using credit products within your budget range right from the early stages of life.
Payment history contributes 30% of the score, while credit exposure, which is also known as the credit utilisation ratio, contributes 25%. Another 25% of the score is based on credit type and duration. Various other factors, like hard inquiries and loan rejections, contribute to the remaining 20%.
Read More:: What is the best CIBIL Score
Banks and lenders rely on credit scores to evaluate the borrower's repayment capability while sanctioning credit cards or loans. Hence, a good CIBIL score will make your credit application approval process easier. Also, if your credit score is low, even if the bank sanctions your loan, they may offer you lower loan amounts or credit limits and charge you higher interest rates.
Can you believe that, with a low credit score, renting a house or getting a job may sometimes be difficult? Yes, some landlords check your credit score to decide whether or not to rent their premises to you. Also, some employers check your credit score to understand your creditworthiness, especially when the job demands you to handle financial responsibilities.
So, whether you are a new borrower or one who suffers from a low CIBIL score, building a good credit score is the need of the hour.
Checking your CIBIL score is easy and involves just a few steps.
1. Visit the CIBIL website.
2. Click 'Get Your CIBIL Score'.
3. Enter the required basic details about you.
4. Attach an identification document.
5. Click 'Accept and continue'.
6. You will receive an OTP. You can access your dashboard using the OTP to check your credit score.
You can also log in using your PAN details to check your CIBIL score without OTP.
Read More:: RBI Guidelines for Credit Cards
Newbies unaware of what is cibil score will have a NO CIBIL score, and with no score, it is tedious to avail of any credit-based products in emergency situations. So start building your score so that you can always be ready to face any financial emergency. The only way to build your credit score is to start using some credit products like loans or credit cards. Below are a few ways to begin with.
1. Secured Credit Cards are great ways to kick-start your credit score-building process. You can get yourself secured credit cards upon depositing some amount. The lenders will be ready to sanction credit cards with a credit limit equivalent to the amount deposited so that they can recover your credit amount if you fail to make the payments. Ensure that you repay the bills promptly so your credit score gradually builds up.
2. Opting for loans against your FD instead of closing the FD account in times of financial need is a great way to start your credit journey and will help you build your score. As you are opting for a loan against an amount deposited, banks cannot deny your loan.
3. If you have no credit score and a costly product to purchase, opt for the Buy Now Pay Later (BNPL) option instead of paying cash. Purchasing products using the BNPL option is yet another credit option that will help you build CIBIL credit scores while avoiding high financial burdens. You can pay the installment on time and be assured of an increase in your credit score.
Read More:: What Happens If You Default on Your Credit Card
Even if you’re a credit card user or have used loans before, you may have a low credit score due to some late payments, missed payments or some other issues in your credit report. It is necessary to take steps to rebuild your CIBIL score. Here are some must-dos for repairing your CIBIL score.
Missed payments, delayed payments, and partially paying the bills are major factors that will pull down your CIBIL score. Missed payments are signs that you are not financially responsible, and late or partial payments are signs that you are not paying much attention to the money you owe. The longer your payment is past due, the more negative impact it will have on your score. Even a single missed or delayed payment is enough to cut down your CIBIL score.
Make a decision not to miss or delay a payment hereafter. You can set a reminder so that you never forget payment dates. Also, you can automate payments and set a reminder to check whether the payment is done. To avoid partial or delayed payments due to lack of money, make sure you use credits within your budget and reserve some amount a month ahead so that you never fall short of money for bills and debts.
If you have credit cards and you are using them to their maximum level, then you are misguided. Yes, using credits to the maximum level is an indication that you highly depend on credits to handle your financial needs. Experts consider a 30% Credit Utilisation Ratio (CUR) to be a good ratio and anything more than 30% will bring down your CIBIL score.
So, make sure to upgrade your credit limits or have multiple credit cards so that your CUR will be around 30%. But before upgrading your credit limit, you should be aware of the safe maximum credit limit that you can effortlessly handle. Thoroughly analyse your income and expenditures and wisely decide how much your credit limit is safe.
A strong credit mix in your credit report is proof that you are good at handling different financial responsibilities and credits wisely. Hence, credit mix is also considered while computing the CIBIL score.
To improve your credit mix, you can opt for new credit products to show a variety of credits in your credit report. But don't avail of credit products just to increase your credit score, as this is not a major factor in the CIBIL score formula.
Read More:: Credit Score Vs CIBIL Score
Each time you apply for a credit card or loan, the bank or the lender will check your credit score, which is considered a hard inquiry. Hard inquiries are negative values in the CIBIL score calculation and will decrease your score. Hard inquiries stay on your credit report for about seven years, and hence, having multiple hard inquiries in recent years is a sign that you are in a financial crisis.
Make sure you Never apply for many credit products simultaneously. If you are already in a credit plan, you can opt for an upgrade of credit limits to avoid applying for a new credit card.
Credit duration is yet another factor that gives you a good score. If you have a credit account with a good credit history, it is a good practice not to close that account until that is the only option left. Older accounts give the credit bureaus the opportunity to assess your credit behaviour for a longer period. So, never miss that golden opportunity. Instead of closing older credits, you can upgrade or downgrade if possible to keep the account active.
If you think co-signing for a loan, especially when someone you know is in financial trouble, is an act of kindness, then read it twice. It can sometimes spoil your financial creditworthiness. Yes, your credit score not only depends on your credit history. If you have co-signed any loans, then any default in the payment will affect yours, too. When you co-sign, that means you are assuring that if the primary account holder fails to repay the amount, you are responsible for that, right? So if the payment is delayed or missed, that shows your financial failure, too, right?
Before co-signing, brainstorm other options and possibilities to help your friend or relative solve their financial issue without you co-signing for a loan. If co-signing is the only option, double-check his/her creditworthiness to stay safe.
Wrong information in the credit report, like a wrong address or wrong data regarding a credit card, may also be the reason for your low score. This may not be your fault, but it will negatively impact your credit score. Why do you want to sacrifice your CIBIL score for someone else’s fault?
Make it a practice to check your credit report frequently. Pay attention to details like communication details, credit history, credit activities, and personal information. If you find anything wrong, don’t wait. Jump into action. Notify the appropriate authorities and resolve any errors so your credit score will be accurate and free from errors.
Following the above steps, you can rebuild your credit score. Even after you have reached a decent CIBIL score, frequently check your credit score to make sure you are within the safe limit.
Read More:: Is a 750 Credit Score Good?
So, what is cibil score for loan? If your loan and credit card applications are rejected, your low CIBIL score may be the underlying reason. Building or rebuilding your CIBIL score is solely dependent on your financial activities. It is super easy to achieve a good CIBIL score, but it may take some time. So check your CIBIL score and take steps to reach a safe CIBIL score if it is low to avoid stress and delay in the approval of any credit-based products in the future.
A CIBIL score is said to range from 300 to 900. But why is my CIBIL score zero?
If you have never taken a loan or used a credit card, then you will have no credit history to calculate your credit score; hence, it will be zero.
Do debit cards help in building credit scores?
No. Because using debit cards is using your own money and not credits. Your credit score will build up or break down only when you use credit products like loans, credit cards, etc.
I am using a credit card and promptly paying my bills; why is my CIBIL score still low?
Firstly, your credit score will not build up in a single day. It will take at least a few months. Secondly, make sure your credit card lender submits reports to the CIBIL credit bureau. Because not all lenders and banks submit reports to all credit bureaus.
Is checking my CIBIL score a hard enquiry which will impact my CIBIL score?
Banks and lenders checking your credit score for loan or credit card approval process falls under hard inquiry. If you check your CIBIL score, this is just a soft inquiry which will not impact your score.
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