How CIBIL score impacts your loan eligibility?

Purchasing a house is perhaps one of the biggest decisions one can make. It is a huge investment and requires ample research and planning. Budget plays a significant role in the decision-making and, therefore, people typically opt for housing loans to finance the purchase. Because of the pandemic, interest rates on loans are at an all time low. This makes the current time conducive to take the big leap: applying for a housing loan.

However, the loan application process is not easy. Before offering a loan, banks make sure that the applicant will be able to repay it in time. In other words, they check for the applicant’s eligibility. But what does it take to be eligible for accessing a loan? Let’s find out.

Loans provide financial leverage that extends beyond one’s earnings. Whether it is a home loan, personal loan, or any other kind of loan, the credit is extended by the lender based on certain key parameters. In India, a borrower’s eligibility is determined by their CIBIL score.

Credit Information Bureau India Limited (CIBIL) is a credit information company and part of TransUnion operating in India since August 2000. CIBIL gathers and maintains credit records of individuals and business organizations. CIBIL score is a three-digit number ranging from 300-900 and is calculated based on a person’s credit or loan history. The higher the CIBIL score, the more convinced the lender is about a borrower’s repayment capacity.

As the saying goes, the more the merrier. It holds for the CIBIL score as well. A high score implies that the processing of your application will be faster, interest rates are easily negotiable, and allows you to borrow a large sum of money. A low CIBIL score indicates an unstable financial position and reduced repayment capacity. Missed payments, multiple loans, frequent credit inquiries, high credit utilization rate, inaccurate management of credit types, and zero credit history can result in a low CIBIL score.

If you are new to credit, banks will determine your creditworthiness based on factors other than your credit score or history. These include your existing repayment capacity which will depend on your income and employment stability. In such cases, getting a credit account and maintaining it to build a good CIBIL score can help you accelerate the loan process.

1. Punctual repayment: It is important to maintain a consistent and timely repayment schedule to build your credit score. Doing so can pave the way for lenders to trust you more and for them to consider extending you larger loans in the future. In addition, paying off the debt lessens the interest burden on you.

2. Clearing past bills: Banks look at the history of borrowers to determine their creditworthiness. A record of timely and consistent payments over a long period is crucial for building a good credit history which is reflected in a higher CIBIL score.

3. Debt consolidation: You can look to consolidate all your existing debts into one to reduce the repayment burden. Credit consolidation will help you build your credit history by reducing the amount of interest you are paying on various loans and bills, thereby improving your credit score.

4. Diversifying credit: If you lack credit history, your CIBIL score will be low. In such a case, make sure you borrow different types of credit. Borrowing both secure and unsecured loans with different lengths and durations will help you build your score.

5. Reviewing credit report: Sometimes errors may creep in when CIBIL updates your records. This may impact your credit score through no fault of your own. Therefore, checking your CIBIL report from time to time is advisable. Doing so will enable you to identify errors and correct them by submitting a CIBIL Dispute Resolution Form online. It will also give you insight into your CIBIL score, helping you understand how lenders view your financial history over time and how you can improve it moving forward.

6. Avoiding taking too much debt at once: Restrain from taking a big loan or multiple loans if you are underequipped to repay the borrowed amount on time. Prior to applying for a loan, research the market and check how much you will need for your housing project. Remember that you will also have other expenses such as renovation and furnishing your new home.

7. Lower credit utilization ratio: A higher credit utilization ratio is usually associated with borrowers who take on a lot of debt. In such cases, it becomes difficult to maintain good financial discipline and repay the loan on time; hence the lender will not be able to trust the borrower. Using less than 30 percent of the total available limit is a good rule of thumb to improve your credit score.

In conclusion, it is important to ensure that you are eligible for a loan before you apply for one. A CIBIL score is not the sole criterion in determining your eligibility but it is the most convenient one as it will give a quick indication of your creditworthiness over time.