When an individual applies for a loan or a credit card or any credit line with the bank or the financial institution, then he/she is required to sign a consent form authorizing the bank to provide you with the Credit Information Report.
Until now people were not aware of the impact of a good CIBIL score or good credibility while applying for a personal loan. Whether the borrowers who choose to secure or unsecured credit check through various banks and financial institutions, a good CIBIL score enhances the credibility and the creditworthiness of the borrower.
The significance of Credit Information Bureau
The Credit Information Bureau is highly responsible for providing and increasing transparency, efficiency and credibility issues related to credit access as well as handling the credit accounts of the customers besides companies and other financial institutions. This procedure is carried out by all the follow-up history of the credit cards and loan repayments, and then CIBIL monitors all the transactions.
As the banks and financial institutions rely on CIBIL scores to evaluate the potential risk that is involved in lending the money to the customers, then the approximation of losses is estimated.
Therefore, CIBIL plays a critical role in enhancing India’s financial system and helps customers to have a secure credit transaction and help grow their business effectively and efficiently.
How CIBIL develops credit score?
The CIBIL score indicates the creditworthiness of the customer. It suggests the capability of the individual to borrow and take new credit from the lenders. Usually, the CIBIL score is used by the banks and the financial institution as the indicator to evaluate the probability of whether the applicants can pay their debts or not.
The credit score is obtained from the client’s records submitted by various banks and financial institutions to the CIBIL. Well, these records are provided within a pre-defined period which in most of the cases is 30 days. This credit information is used by most of the banks and financial institutions to evaluate the creditworthiness of loan applicants. This report also provides with insight into the risks involved in giving loans to the applicants.
Good and Bad Credit Score
As the financial institutions submit the information regarding the client’s history to the CIBIL, it gains a clear and thorough understanding of the transactional history related to defaults in repayments, their borrowing habits as well as the tendencies of their repayment patterns. With this information, CIBIL generates a three-digit number that is referred to as the credit score of an individual that ranges from 300 to 900.
The higher the credit score of the individual, the better is the chances of obtaining different kinds of loans. However, with a low or bad credit score getting a regular loan might become even difficult for the individual.
Factors that play a vital role in defining credit score:
It is imperative for the applicants to understand that the data used for generating the credit score is of only the past six months of their credit history. Moreover, there are certain points to be kept in mind as they play a significant role in generating the credit score;
- A single default in the repayment process can influence the score in a negative manner as well as the repayment history of the applicant comprises of 35% of the credit score.
- Another 30% is comprised of the amount that is repaid to the creditors, and this information is obtained by comparing the credit limit amount used by the loan applicants to the amount so available.
- The time that is left to pay back the remaining amount of the loan on a regular basis comprises another 15% of the score and generally, a longer time period is preferred.
- Applying for many loans impacts your credit score negatively as well the amount of new loan comprises of another 10% of the credit score.
- CIBIL provides a great reference to a diverse credit mix, and the applicants who have availed through various types of credits comprise of 10% of the credit score.
What does ‘no CIBIL score’ mean?
The applicants who do not have any secured/unsercured loan in the past or do not have credit card are considered as applicants with no CIBIL score. However, if these two types of data are lacking, then that indicates financial inactivity which results in having no credit or zero credit score. It will profoundly impact the ability of the applicant to get the desired loan from the financial institution. However, there is a possibility to increase the CIBIL credit score from zero to a positive value if the applicant applies for a credit card facility or also takes an EMI free loan from a trusted lender and by also repaying the outstanding amount on time (if any).
Therefore, we can say that the CIBIL score plays a very important loan in enhancing the creditworthiness of the applicant only if he follows and goes through all the procedures well in time.
Various factors help the organizations to approve the loan applications of the applicants, but the CIBIL score plays a crucial role in deciding the interest rate that the banks will offer. Higher the CIBIL score, lower the rate of interest and vice-versa. We can say that our financial life highly depends upon the CIBIL credit score.
Financial emergencies can come at any time, and we may have to apply for a loan, and only it is then the CIBIL score matters a lot.
India has four different credit information companies that are recognized by the Reserve Bank of India. Among which CREDIT INFORMATION BUREAU LIMITED was founded in the year 2000. A CIBIL score is a kind of credit rating that represents the creditworthiness of an individual or the business. The Credit Information Bureau Limited Score is a three-digit number that reflects the credit history of the individual. CIBIL is responsible for collecting and maintaining information about individual’s payments on their loans and credit cards. Various banks and other financial institutions provide CIBIL with this information every month. CIBIL score is given to each borrower whose records are present with the CIBIL.
The CIBIL score varies from 300-900, in increasing order of creditability. CIBIL monitors the payments and transactions of the individual for about 12 to 18 months before providing the CIBIL score.