Credit score: What is it and how does it affect your loan approval?

If you are someone who is interested in taking out a loan or applying for a credit card, then knowing your credit score is extremely important. Credit score plays a crucial role in determining your suitability for loans. Lenders also pay close attention to your credit score as they assign you the interest rate, repayment period, and principal amount for your loan. Here we are going to understand what a CIBIL score is and what impact it has on your credit loans.

What is a CIBIL score?

The Credit Information Bureau (India) Limited (CIBIL) is the most popular credit information agency among the four agencies licensed by RBI. The three other credit bureaus operating in India and licensed by the RBI are Experian, Equifax and Highmark. Nevertheless, it is interesting to note that CIBIL score is the most popular and widely used credit score in India.

CIBIL Limited currently has credit information on 600 million individuals and 32 million companies. CIBIL India is a subsidiary of the US-based TransUnion company. The CIBIL score is a 3-digit numerical representation of your credit history, which roughly reflects your credit spending habits as well as any past defaults. Usually this ranges from 300 to 900.

What is a good or bad CIBIL score?

As mentioned earlier, the range of your CIBIL score varies from the lowest 300 to the highest score of 900. Keep in mind that the higher the numerical value, the better your chances are of getting your loan or credit card application approved. Let us understand the CIBIL scores in detail;

How does the CIBIL score affect your loans?

When you apply for a loan, the credit report is the first thing a bank or financial institution looks at. A low score can lead to application rejection, while a high score is used by the lender to consider other factors about you to determine your creditworthiness.

The CIBIL score is a crucial factor, especially if you are borrowing an unsecured loan. This is because a good CIBIL score gives the feeling that you are able to repay the loan on time and that you have a good track record of previous repayments.

So you can get the loan at the terms you want. However, a bad credit score can be seen as a sign of irregularity and that you have fallen behind on payments in the past. This increases the risk for lenders and can therefore affect the approval of your loan.

How can you improve your CIBIL score?

You can improve and build your CIBIL score in many ways, which can improve your future loans. If you already have a current loan or a pending credit card bill, make sure you make your payments on time.

In the case of credit cards, you should try to pay your bills in full one time and avoid paying a minimum amount. This allows you to stay ahead of your invoices and avoid the risk of payment defaults.

You should always consider how much debt you are borrowing, as overuse of credit cards and high loan amounts can put you at risk of falling into debt. As a result, you may find yourself in a situation where you have to repay more amounts than you can even afford.

Conclusion

It is always a good idea to plan your financial needs and always use credit cards wisely. With loans, you should always stick to the amounts you actually need, as this will result in higher amounts EMIs.

CIBIL score cannot be improved overnight, but with constant efforts and regular repayments of bills and EMIs, you can gradually increase your CIBIL score and make informed decisions.