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The
CIBIL score is an integral part of every individual’s financial life, and is
viewed seriously by lenders today. What a score does, in a nutshell, is indicate
a borrower’s creditworthiness to a bank or financial institution, which is
taken into consideration while determining whether to accept or reject a loan
or credit card application.
A
score while not considered in isolation – other factors such as your income,
monthly commitments etc. are also taken into account – when reviewing an
application, forms a major part of the sanction process. Higher the score
better are your chances of loan approval. Even if your application is not
rejected outright, it is likely that with a low score, you would not get a loan
or credit card at the most competitive terms.
What then is a CIBIL score?
Ranging
between 300 and 900, with CIBIL, a score of 750 and above is considered to be
‘good’ and is likely to pave the way for your loan or credit card application
being approved.
What constitutes the CIBIL score?
Very
broadly, below are the parameters taken into account when calculating the CIBIL
score. Not just CIBIL, but bureaus internationally also consider the same
factors.
The
payment history, or repayment track record as well as the amount outstanding
constitute a significant part of your score, so making timely payments becomes
very critical to maintain a good score.
Credit score and usage
India
is seeing increased acceptance of the credit score. In a recent development,
the Reserve Bank of India (RBI) has mandated that financial institutions need
to be members of all credit bureaus. This only shows the growing emphasis on
the tool in the area of lending. There is no lender who does not pull a credit
report and check the score when assessing an application.
In
countries where the risk-based pricing model is used for lending, a credit
score plays a very important role. Here, the interest rate on a loan is
determined not only by the time value of money, but also by the financial
institution’s estimation of the probability of loan default. A borrower who is
less likely to default (based on the credit score, among other parameters) will
be offered a lower interest rate. This essentially means that borrowers will
pay interest rates depending upon their creditworthiness.
Further,
if you look at the global trend, a credit score has moved beyond merely loan
and credit card issuance. Insurance companies too check credit scores before
they determine the premium a customer must pay; hence a score is called for at
the time of underwriting a policy. Telecom operators use credit scores to
determine the deposit one has to set down for a new phone connection, as well
as to assign the credit limit. In a bid to safeguard their interests, if you
are in the United States of America for instance, a landlord is likely to ask to
see a copy of your report to decide whether to rent out their property to you
or not. This helps them gauge the likelihood of the tenant skipping rent
payment. Employers also check credit reports as part of the hiring process,
especially when recruiting for jobs that require a high degree of
confidentially and trust.
Therefore,
a CIBIL score is indeed a big deal and cannot be overlooked by an individual.
How can you improve CIBIL score?
Merely
having an average score will not suffice – it needs to be good, and in an ideal
scenario worked upon so that it can be improved over time. Following can help
you improve CIBIL score:
- Make timely payments on all loan and credit card outstanding.
- Keep your card outstanding balance low and maintain a low credit utilisation ratio.
- Review your credit report at regular intervals by calling for a copy of the same.
- Consider availing of the services of a credit health management company, for professional help to not just build but also enhance your credit score.
In conclusion
An
individual needs diligent financial discipline and sound budgeting, in order to
improve CIBIL score. It is advisable to track your score at regular intervals
and remain credit healthy.
(Written by Arun Ramamurthy, author of “Unlock the Power of Your Credit Score”
: India’s first book on credit scores)
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