Will my parents’ CIBIL score impact my education loan?

An education loan can be the answer to many students’ dreams. With the rapidly escalating cost of education today, it is not surprising that many are availing of the option.

In India, there are four credit bureaus licensed to operate by the RBI, namely CIBIL, Equifax, Experian and CRIF High Mark. In the consumer space today, CIBIL is the front-runner being the oldest bureau, with Equifax being a close second. With the vintage that CIBIL enjoys, the term ‘credit score’ is often interchangeably used with the term ‘CIBIL score’, but do note that ultimately, all four bureaus provide credit reports and scores.

How is an education loan structured?

Education loans today are available for both under-graduation and post-graduation studies. A student can apply to any bank or NBFC for the same, and can look towards a large portion of their education expenses being met.

Typically, an education loan requires both an applicant (the student) as well as a co-applicant (in most cases, a parent, or if the student is married, the spouse). This is because when a lender extends an education loan, they are taking a call to lend basis the future potential of the student to earn an income post completion of study. Hence, to service the loan in the interim, a co-applicant is called on board.

Why is the credit score important?

As with any other retail loan product, your credit score plays a key role in the loan approval process. When you make an application for an education loan, the lender (whether a bank or financial institution) will pull up a copy of your credit report from a credit information company, or credit bureau. This report contains your score, a three-digit numeric representation of the data that forms your credit report.

When you apply for an education loan, not only is your individual credit report pulled out, but so is the report for the co-applicant. Hence, if the co-applicant has a bad or low credit score, chances are the loan application will be rejected.

It is important to know that the score is not the sole factor that a lender will base the decision on; however it is indeed a critical parameter. The higher your score better are the chances of the loan application being approved, hence it is critical to remain credit healthy. What a score indicates to a lender is the creditworthiness of an individual – both the willingness and the ability to repay outstanding debt.

Further, the score also plays a key role in determining the interest rate at which the education loan may be offered to you. A good score indicates to a lender that the applicant is able to use credit well, and is therefore more likely to provide the loan at the most competitive interest rates and other terms.

In conclusion

Given the sensitive nature of the loan, and that a student’s education may just hinge on it, it is up to the parent to ensure that they remain credit healthy. Should there be any inaccurate or erroneous information in their credit report, it should be rectified immediately.

A good practice would be to request for a copy of your credit report prior to making the loan application itself, so that you know what to expect. It is always better to be proactive rather than taking the necessary steps closer to the loan application.

Taking the help of a credit health management company may be a good idea, to monitor your score and better it over a period of time. Not only will this help with any other loan or credit card applications you choose to make in the future, but your immediate goal of ensuring your child’s education is successfully met.

How to get a loan with a low CIBIL score

So you have a low CIBIL score and still want to apply for a loan. Follow the following steps to be able to have access to credit facilities:

  1. Check your CIBIL report thoroughly for any negative flags or more importantly an error since errors can lead to serious implications and result in loan application getting declined.

  2. In case you have had repayment issues in past and have unpaid amounts due on your accounts, please contact the concerned lender and pay them complete dues till date. Any outstanding past the due date again will have detrimental impact on your credit health and thus lead to underwriter declining your credit request.

  3. Once you have paid off your dues to the lending institution, they shall give you a letter of no dues. Do ensure that the letter being given by the lender explicitly states that the negative flags like “Settled” or “Written Off” on the particular account will be removed from the credit bureau report. Continued reflection of these negative flags again will lead to rejection from banks and thus making the availability of funds inaccessible.

  4. Errors on credit reports are common. Please check your report thoroughly. If you find any error on your report, please contact the concerned lending institution and CIBIL, and raise a ‘cibil dispute’.

  • On doing so, the CIBIL will forward the request to the financial institution that has reported the data.

  • Upon getting a clarification from the concerned lending institution, the credit bureau shall rectify the records. This shall in turn lead to improvement of your credit score.

  1. Remember that while your credit score plays an important role in the loan approval process, other factors are also taken into consideration by a lender.

    • This is especially true for loan products.

    • It is likely that a low score may mean approval of a loan at higher interest rates, or with other mitigating measures.

  1. Consider trying to better your credit score by getting professional help. A higher score will not only lead to you getting funds at the time of need, but also at a better rate of interest. A lower interest getting charged on your loan will result in substantial savings.

Effect of Marriage on Credit Score

When they made the movie “Shaadi ke Side Effects” or Side Effects of Marriage as translated in English they forgot to talk about effect of matrimony on Credit Score!! No worries we will remedy that. First questions first “does marriage have any effects on your credit score at all”.

Does Marriage Affect the Credit Scores of Both Partners?

The short answer is “no” at least directly. When two people tie the knot their credit scores do not merge. The credit scores are for individuals and reflect the individual credit history and continue to so even after two people officially decide to live together. While after marriage you may choose to have a joint bank account there is no joint credit score.

So even after you get married the debt and credit cards in your name get treated just the way they were before you get married. So if you default on your payments only your credit score is adversely affected and the converse is also true.

Similarly if you apply for a loan in your name only your credit history will be evaluated and not that of your spouse. Any digression only in your credit history will be considered and not his/hers. A good credit score for your spouse cannot get you any brownie points. However if you apply for a joint loan then both your credit histories will be considered individually and the decision will be made accordingly.

Some Special Tips for Women:

Women need to take care of some aspects especially when they get married. Even if you take your husband’s surname post marriage it will have no bearing whatsoever on your credit score; the credit history in your maiden name does not get erased. So you can continue with your credit trail whether god or bad.

You need to inform the concerned parties including banks and creditors about the name change so that changes can be made at appropriated places. The history gets carried forward with the new or the changed name/surname. There are others aspects like the date of birth etc that establish the identity of the person so there is no need to worry on this aspect i.e name/surname change post marriage.

Now the next aspect I want to touch upon is that women should maintain their individual credit cards and bank accounts and continue to maintain them irrespective of the fact whether you are working or not. Even if you start a joint account or take an add-on credit card do continue with at least one card and one account in your individual name whether maiden or otherwise. An old account is much more helpful when it comes to establishing the credit habits of an individual.

Your credit history could come in handy in case due to some exigency like financial hardship, death of spouse or bad credit score of spouse you need to use your credit score for applying for a loan. In case years down the line you want to start afresh and have a credit history it might become difficult and cumbersome for you to get a credit rating. Also at least a six month trail is required for a credit rating.

However…..

In case of a loan taken in joint name shall impact the score similar to a loan taken in individual name, irrespective of the fact that the person may be second or third joint applicant and repayments are being done from the primary applicant’s account.

Marriage does have some indirect impacts on your credit score. In case either of the partner is not financially disciplined it can affect the family finances and can cause you do default on payments thereby impacting the credit score negatively.

Marriage involves a lot of expenditure (at least in India) whether its pre-marriage preparations or post-marriage shopping and setting up a new house. So it’s important that you plan carefully and don’t overspend or max your credit cards. It’s not a good idea to begin a new life in debt.

A positive outcome of a marriage is two credit scores. So in case one partner has a lower credit score than you always have a choice of using the credit score of the other partner when applying for a loan.

Though marriage does not affect the credit score directly, it does impact your life and lifestyle. With careful planning, you can avoid any pitfalls and make the best of it; financial or otherwise.

How Credit Score can be inversely related to a Housewife?

Well first things first: the post title though may sound gender biased but it is a reality. Second it actually means that how a non working spouse affects the credit report adversely but since we still have very few house husbands (non-working male partners) in India it make more sense to keep the title focused on housewives. Personally I don’t like the word housewife; I prefer the more modern politically correct homemaker but I’ll not let not my views cloud the relevant discussion here. The emphasis here is on providing useful information rather than being polite….

Let’s consider a few examples of couples applying for a home loan:

  1. Mrs. and Mr. Sharma are a working couple and apply for a joint loan as they both have a good credit scores.

  2. The Mehtas are also a working couple. Mr. Mehta’s score is not very good due to some dispute with a credit card company so they apply for a loan in Mrs. Mehta’s name who has a good credit history.

  3. Mrs. Agarwal is a housewife and has no credit score so Mr. Agarwal applies for a home loan in his name. His loan is rejected due to a bad credit score so he is trying to improve credit score and apply for a loan in coming months.

In case the spouse is not working and has no credit score then there is no choice but to apply in the name of the sole earning member. While this necessarily is not a bad thing but it does limit one’s options.

Debt to Income Ratio Is Also Important:

Debt to income ratio is the ratio of the total monthly debts to the monthly income. If both partners are working and apply for a loan jointly incomes of both are clubbed together to determine the debt to income ratio. Obviously a higher income means higher loan eligibility and the converse is also true. There are different opinions about an ideal DTI ratio but it should in no case cross beyond 40%. Though not a part of the Credit Score it is equally important when applying for a loan.

Your loan can be rejected due to a high debt to income ratio also. Getting somebody to co sign can help solve the problem.

The Truth about Add-On Cards:

If you are a housewife and have an add-on card then it will be useful to go through the ensuing discussion. A person with an add-on card on his/her name gets a Credit Score of -1; usually the score ranges from 300-900. Thus this credit score has no relevance but your shopping with the credit card impacts the credit score of the primary card holder.

Exceeding the credit limit or utilizing it fully or almost fully regularly impacts the credit score negatively. Keep the credit utilization up to 40-50% of the limit amount so that you do not appear to be overtly dependent on credit or seem to be credit hungry. Having two credit cards with different cycles can help in spreading your monthly spending.

Do not convert your unpaid dues into EMIs though the credit card company may offer you lucrative options. This also impacts the credit rating negatively. Always remember to make payments before the due date. In case you have a habit of doing above then remember that since you the card is in the name of your spouse his credit history will get adversely affected.

Two earning members with two credit history have a choice of using the better one when applying for loans but not when only one member is earning. Thus the housewife’s shopping behavior especially when credit cards are involved is an important factor which affects the husband’s overall credit score.

A add on credit card also means that both the primary and secondary user must be in sync when they charge their bills on credit card. If both keep charging without informing the other about the transactions it can lead to a lot of trouble at the end of the month. Be sure to discuss with each other what you have charged on your card in a month so that the other can adjust accordingly.

Being a non-earning member absolves you from the responsibility of having to pay for the credit card bills but not from being financially aware and cautious.