How important is Credit Score (CIBIL) for home loans in India?

A Credit Score is a number that is based on your history of credit behaviour. It reflects your credit worthiness.

If you have been thinking about applying for a home loan, one of the first things one should do is check Credit Score through CIBIL. This is because, even if you have a low credit score, you can work towards improving it over a few months time. You can apply for the loan after these efforts have borne fruit, as a good credit score is a key requirement in the loan approval process.

A CIBIL credit score can be explained as a 3 digit numeric outline of your credit history. The score is calculated by taking into account your complete borrowing details, history, repayment pattern and default instances (if any) etc. It is scaled in a range of 300 to 900 points. The higher the points i.e. close to 900, better will be the chances to get the loan from a lender. A good score is important to get a loan with ease. Lower score (close to 300) indicates a discrepancy for borrowings in the past.

According to CIBIL, the largest CIC in India, 79% of the loans approved are for individuals with a score greater than 750.

TransUnion CIBIL Limited is India’s first Credit Information Company, also commonly referred as a Credit Bureau. It collects and maintains records of individuals’ and non-individuals’ (commercial entities) payments pertaining to loans and credit cards. These records are submitted to them by banks and other lenders on a monthly basis; using this information a Credit Information Report (CIR) and Credit Score is developed, enabling lenders to evaluate and approve loan applications. A Credit Bureau is licensed by the RBI and governed by the Credit Information Companies (Regulation) Act of 2005.

The CIBIL Score plays a critical role in the loan application process. After an applicant fills out the application form and hands it over to the lender, the lender first checks the credit score and credit report of the applicant. If the credit score is low, the lender may not even consider the application further and reject it at that point. If the credit score is high, the lender will look into the application and consider other details to determine if the applicant is credit-worthy. The credit score works as a first impression for the lender, the higher the score, the better are your chances of the loan being reviewed and approved. The decision to lend is solely dependent on the lender and CIBIL does not in any manner decide if the loan/credit card should be sanctioned or not.

There are 4 major factors that affect your score:-

  1. Payment history: Making late payments or defaulting your EMIs or dues (recently or consistently) shows you are having trouble to pay your existing credit obligations and will negatively affect your score.
  2. High utilization of Credit Limit: While increased spending on your credit card will not necessarily affect your score in a negative manner, an increase in the current balance of your credit card indicates an increased repayment burden and may negatively affect your score.
  3. Higher percentage of credit cards or personal loans (also known as unsecured loan): Having a balanced mix between the secured loans (such as Auto, Home loan) and unsecured loan (such as Personal loan, Credit Card) is likely to have a more positive effect on your score.
  4. Many new accounts opened recently: If you have recently been sanctioned multiple loans and credit cards, then lenders will view your application with caution because this behavior indicates your debt burden has increased increase, which will negatively impact your score.

Factors that don’t affect your credit score

CIBIL scores are calculated based on many factors but there are some factors that don’t make a difference to your CIBIL score.

  • Savings accounts
  • Education
  • Income
  • Gender
  • Race/ Ethnicity

You can improve your Credit Score by maintaining a good credit history. This will be viewed favorably by lenders and it can be done with 6 simple rules:

  1. Always pay your dues on time : Late payments are viewed negatively by lenders
  2. Keep your balances low: Always prudent to not use too much credit, control your utilization
  3. Maintain a healthy mix of credit: It is better to have a healthy mix of secured (such as home loan, auto loan) and unsecured loans (such as personal loan, credit cards). Too many unsecured loans may be viewed negatively.
  4. Apply for new credit in moderation: You don’t want to seem Credit Hungry; apply for new credit cautiously
  5. Monitor your co-signed, guaranteed and joint accounts monthly: In co-signed, guaranteed or jointly held accounts, you are held equally liable for missed payments. Your joint holder’s (or the guaranteed individual) negligence could affect your ability to access credit when you need it
  6. Review you credit history frequently throughout the year :Purchase your CIR from time to time to avoid unpleasant surprises in the form of a rejected loan application

Advantages of a good CIBIL score:

  • Ability to get a line of credit easily.
  • Quick approval for mortgages.
  • Low interest rate credit cards.
  • No security deposit on cell phones.
  • More negotiating power.
  • Get approved for higher limits.
  • Easy approval for rented/leased houses and apartments.
  • Low interest rate home loans and car loans.

CIBIL scores play a very pivotal role in your financial journey. A bad CIBIL score or credit score is not acceptable to any institution and might hamper your chances of getting credit or availing other advantages of having a good score. Responsible use of credit, making payments on time and having an optimum number of loans and credit cards will ensure a good CIBIL score, thus, ensuring a smooth financial journey.



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