People usually take a loan to meet certain financial requirements. Most financial institutions take a look at the CIBIL score of a person before accepting their loan application. In this regard, having a decent CIBIL score can help in getting approval for a loan at a lower interest rate.
Keep reading to know all about CIBIL scores along with how much credit score is good.
What is CIBIL score?
TransUnion CIBIL Limited, formerly known as Credit Bureau (India) Limited, is the most popular among the four credit information companies in India. As a credit bureau, it maintains records of credit-related activities of individuals as well as small companies.
Credit score is a three-digit numeric summary of any individual’s credit history as well as a reflection of their credit profile. The credit score offered by CIBIL is popularly known as CIBIL score.
CIBIL score ranges between 300 to 900. Many people have a query as to how much credit score is good. To answer this question, the closer a person’s CIBIL score is to 900, the better it is.
Factors that determine CIBIL score
There are a number of factors that influence an individual’s CIBIL score. Depending on these factors, their credit score CIBIL score might rise or go down. They are:
- Payment history
It is the most important factor that is taken into consideration while providing individuals with a CIBIL score. An impeccable credit history of individuals ensures that they are responsible borrowers and are diligent towards meeting their financial obligations. Ensuring timely monthly EMI payments for loans and credit card bills impacts the credit score positively.
- Credit mix
If a customer opts for a home loan, has a credit card account or has availed any other type of loan, it creates a diversified credit portfolio. Now, if that person is able to repay all these loans on time, this shows their capability to balance different kinds of credit options together. This helps in strengthening credit history as well as making their report appear creditworthy.
Many banks and NBFCs offer pre-approved loans to their long standing customers who have a good credit score. This speeds up the process of loan application and comes with a lot of other benefits. One can visit the official website of their preferred bank or NBFC to find out more about pre-approved home loan offers.
- Credit utilisation ratio
Credit utilisation ratio indicates the amount of credit one has used out of their total credit limit. Having a low credit utilisation ratio of up to 30% highlights that the borrower is not credit-hungry, which, in turn, has a positive impact on the borrower’s credit score. The higher your credit exposure, the higher the credit risk of the lender.
- Pending debts
Having unpaid debts or delaying repayment might have a negative impact on the borrower’s credit score. The unpaid debts usually get highlighted in one’s credit report, which portrays their inability to repay debt on time. Everyone needs to pay back their debts, irrespective of whether it is small or large.
- Multiple applications for credit products
Every time you apply for a credit product, the lender applies for a credit report check. This is known as hard inquiry. The more a borrower applies for credit products, the more hard inquiries will be made against his/her report. This indicates their hunger for credit and would negatively affect their credit score. Therefore, people should maintain a time gap between multiple credit applications.
Why is CIBIL score important to apply for a home loan?
When a customer applies for a home loan, credit score plays a major role in its approval. CIBIL or credit score helps lenders to gauge the borrower’s ability to pay back the loan on time.
Here are some of the reasons proving the importance of credit score for home loan:
- Helps lenders understand credit behaviour
When lenders check a person’s credit report, they get an idea regarding how many loans the borrower has availed as well as his/her credit repayment behaviour. This gives the lenders a fair idea regarding borrower’s credit utilisation ratio and dependency on various types of credit options.
- Helps in knowing whether you have other ongoing loans
Having an ongoing loan while applying for another loan might be considere risky by lenders. Availability of a new loan adds to financial responsibility. Therefore, checking credit score helps lenders understand whether the borrower will be able to juggle multiple types of loans.
Lenders also check debt-to-income ratio which is the ratio between monthly income drawn and amount of money spent on repaying loans and credit card bills. Higher the debt-to-income ratio, lower the chances to get approval for a home loan.
Tip to improve CIBIL score for a home loan
A credit score of more than 750 is favorable for getting approval for a home loan. A score lower than that might cause hindrances in the process of approval and disbursal. In this regard, there are various ways people can improve their CIBIL score instantly. Here are some tips on how to improve your CIBIL score:
- Check credit report regularly
People need to keep a constant tab on their credit report to check whether it is accurate or not. In case of any error or discrepancies, they should make sure to report it and get it rectified so that there is no negative impact on CIBIL score.
- Set reminders for repaying loans
Multiple outstanding debts might have a negative impact on an individual’s credit score; therefore, it is wise to pay credit card bills and loans on time. If there are chances of forgetting repayment schedules, it is better to set reminders and maintain financial discipline. This will save any penalty that needs to be paid in case of default or delay.
- Avoid taking too many loans at a time
Taking too many loans at a time might create problems during repayment. Therefore, it is better to take one loan at a time and repay it and then opt for another loan. If someone takes multiple loans and forgets or is unable to pay any EMI, it might negatively affect the credit score. Taking one loan at a time and paying it back will help in maintaining a constant credit score.
- Pay attention to spending habits of joint applicants
It is best to take a joint loan with a person who pays all their debts on time. If the other person does not contribute their part, this might negatively impact the credit score of both individuals. Therefore, one should choose their co-applicant wisely.
It is important to note that having a good credit score can help in getting loan approval even if the borrower doesn’t have a high income. Now that it is clear how much credit score is good, one needs to do the needful to maintain the good score diligently.
