Why different types of credit lead to different CIBIL scores

There are various types of credit – both among loans and credit cards – that can determine what your CIBIL score looks like.

When you apply for fresh credit, you need to ensure that you score is ‘good’ or healthy. There are various factors that go into determining your score, which include your repayment history, the number and type of accounts you hold, the length of credit history and the number of new accounts you have open. Each of these parameters has a different weightage on your credit score. Because of this, it is a good idea to keep track of the credit you are using and the effect that it will have on your score.

What then is a CIBIL score?

A credit score is a three-digit representation of your creditworthiness, i.e. it tells a lender about both your intention as well as ability to repay any debt you have availed of.

Every credit information company or bureau provides these scores. In India, there are four bureaus namely, CIBIL, Equifax, Experian and CRIF High Mark. With CIBIL having the first mover advantage by being the first bureau in the country, credit scores are often generically known as CIBIL scores. You can however call for your score from any or all of the bureaus.

Types of credit and your CIBIL score

When you do take on credit, be it a loan or credit card, for example, having a mix of credit helps. It shows that you are likely to be a responsible person, able to handle credit well and hence can have a positive impact on your score. As a result, chances that you are likely to default on payments reduce.

  • Secured loan – Those with collateral backing, such as a home or auto loan
  • Unsecured loan – Popular examples of this type of loan product, where no collateral security is provided, is a personal loan or credit card

Of the two, secured loans work in your favour as there is an asset attached – if you skip making payments, your property or car can be repossessed by the bank or financial institution that had loaned you the money to make the purchase. Ultimately, if there is a risk of losing something, one is more likely to pay!

When you make timely payments towards your loan EMI, your credit score get notched up favourably. Any delays or missed payments immediately bring down the score.

With unsecured loans, lenders tend to view these loans (and borrowers) with slightly more caution, especially if your credit report shows more of this product compared to secured products. The chance of payment default is higher in the case of someone who solely relies on unsecured loans, as there is a possibility of insolvency.

Credit cards can prove to be problematic in an entirely different league, if not used judiciously. It is very easy to rack up spends on a credit card owing to the sheer convenience they offer. It can be tempting therefore to purchase things for more than you can repay, but that can lead into a deeper debt trap. Ideally, stay well within the credit limit assigned to you, and utilise no more than 30% of the credit utilisation ratio. With that, and timely payments (ideally in full), you credit score will not be affected negatively.

Before you apply for fresh credit, do call for a copy of your credit report. You will be able to take stock of the situation, and decide whether new credit is indeed required – essentially, your CIBIL score will tell you where you stand. If you open several new lines of credit say within a time span of six months or so, lenders will tend to view the same unfavourably – it tells them that managing your budget seems difficult, or that you can’t pay off what you owe.

Hence, to make sure your score remains good; do try to have a healthy credit mix, as each of these contributes significantly to your score. Remember, the key to a healthy financial future lies in your credit score – so treat it wisely and well. It is crucial not only to maintain it, but how to boost your credit score is equally important.

Do check out credit sudhaar reviews!

 

 

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What is a CIBIL score and how to get it for free?

A Credit Information Report (CIR) offers an individual a numeric summary of their credit history. It plays a major role should an individual want to apply for a loan, or a credit card, as all banks and financial institutions run a CIR as part of their loan approval process. It helps lenders to evaluate the potential financial risk prior to sanctioning funds to an individual, and thereby mitigating losses. Not only does a CIR help the financial institution manage their business, but it also helps the individual secure a loan or credit card sooner.

What is a CIBIL score?

A credit score constitutes a part of the CIR. Basis the financial information provided by lenders to Credit Information Companies (CIC), or Credit Bureaus, a score is determined. This score, typically based on a scale of between 300 and 900 points, is what is taken into account by a lender prior to offering credit. With CIBIL for example, a score of 750+ points is considered to be good. For a first time borrower with no previous credit history, a score of -1 is displayed. Different CICs, however, may have different scoring parameters.

While calculating the score, a number of parameters are taken into consideration, including information such as the number and type of previous loan accounts (for example, housing loan, auto loan, credit cards), repayment track record, outstanding debt and the duration of the individual’s credit history.

At times, demographic data such as the individual’s place of residence etc. are factored into the credit score. This is a practice followed by some of the newer credit bureaus, when assigning a score to an individual with no previous credit history.

What is the importance of a CIBIL score?

The credit score indicates creditworthiness of an individual. At the time of applying for credit, a good score helps in availing of a loan or a credit card quicker. It may also determine the rate at which the borrower may choose to lend, and the amount and duration of the loan.

What affects the credit score?

Delinquencies or not repaying existing loans on time can seriously impact an individual’s credit score negatively. At the other end of the spectrum, having no loans or unused credit cards may also affect your score, as this provides no past repayment track record for a borrower to assess your creditworthiness.

How to increase credit score?

Diligence with regards to payment can have a positive impact on your credit score. Ensuring timely payments on existing borrowings, and in full, make for a good score. Having secured loans such as home or auto loans also help boost your score.

It may also be prudent to keep track of your CIR, as any erroneous entry in the same may hamper your score. For example, say your credit report shows a default on a credit card payment. It is likely that the reason for delay was owing to a dispute with the concerned card company, and payment was made in full once the query was sorted. However, in the interim should this have been reported to the credit bureau as a delayed payment, it may have negatively impacted your credit score. Should you find any discrepancies, it may be a good idea to have them rectified by contacting the concerned CIC.

How to check your credit score?

There are four CICs in India today, viz. CIBIL, Equifax, Experian and High Mark.

Currently, none of them offer free CIRs. What you as an individual can do is, log on to the concerned CIC’s website and choose to purchase your CIR for a nominal fee. In addition, the CICs require some basic information in addition to an online request form, including identity proof and address proof of the individual. Making it convenient are various payment options, and the promise to deliver your CIR within a reasonable turn-around-time.

Freescoreindia.com however does offer the option of availing of a free credit score from Equifax, on registration on the website.

Tracking your credit history has never been easier!

Is a CIBIL score necessary for loan eligibility?

It is aspirational for an individual to want to own a home of their own, or to purchase their dream car. However, it may not be possible without some financial assistance, to help realise their dreams. Prior to availing of a loan, there are certain parameters to be taken into account.

The general criteria for availing a loan include income, existing loans and repayments details which reflect on the CIBIL report. These behaviours of repayment as captured in a CIR are reflected in the credit score as well. Over the last 10 years the CIR has become an integral part of decision making of banks and the behaviour reflected in a CIR can impact the decision of whether to approve or decline the loan.

What is a CIBIL score?

CIBIL, i.e. the Credit Information Bureau (India) Limited, is the oldest credit bureau in the country. TransUnion (TU), a multinational credit bureau and majority shareholder of CIBIL has developed a credit score basis the data available at CIBIL, and this score is referred to as CIBIL TU score or the CIBIL score. While there are newer entrants such as Equifax, Experian and CRIF High Mark and they also provide scores, currently most lending institutions rely more on the CIBIL score, and consequently a credit score is currently synonymous with a CIBIL TU score.  

Is a CIBIL score necessary for loan eligibility?

Once you apply for a loan and submit the application to the financial institution, they run a check with a Credit Information Company (CIC), or credit bureau for information such as the applicant’s previous credit history, repayment track record, number of loan and card accounts, EMI to income ratio etc. in the CIR. Higher the credit score on the report, higher are the chances of your loan being approved. Further, in most developed market the terms at which the loan is offered may also be better with a good score.

Should a credit score be low, or below average, chances are that a lender would be hesitant to approve a loan. While crucial to eligibility, scores help both the lender and borrower understand the credit history better. The credit score is indeed crucial in the approval process, and a healthy score would definitely go a long way in helping towards loan approval.

Broadly, lenders check CIBIL Score for factors such as previous repayment history, written-off cases, the amount of outgoing by way of EMI versus income, the number of loan and card accounts etc.

I’m a first time applicant. Will I get a loan?

It is very likely that a person applying for a loan may not have availed of a loan or credit card previously. This would mean that a credit report would not show up any relevant data, as there is no previous repayment history to take into consideration. In such cases, a lender may consider other parameters prior to approving a loan, as only a CIR would not suffice.

In the recent past, credit bureaus have started to provide a risk score to those individuals with no credit history. This data is indicative in nature, providing the financial institution a benchmark to assess the loan application.

While a low score need not mean the end of the road, it can certainly hamper your prospects of availing of a loan in the future. If the score is low on account of any inaccuracies in your CIR, it would be prudent to contact the concerned credit bureau to seek which institution needs to be contacted for getting the details corrected. If it is owing to poor financial health, it would probably be wise to take stock of the situation, and rectify it at the earliest.

 

Why is the CIBIL score different for personal loans?

A personal loan is a quick and relatively hassle-free way to secure funds for an unforeseen emergency that requires funds urgently. The best part about personal loans is that the end use is not defined, and you can use the funds to fulfil (almost) anything you had in mind, from a vacation to home renovation to purchasing a new electronic appliance or jewellery. Of course, the usage cannot be such that it violates any laws, for example using the disbursed loan amount for trading on the stock exchange, or gambling or laying bets.

Once you have identified the need for a personal loan, start shopping – look around for the best deals in the market, primarily in terms of interest rates. While the eligibility criteria for a personal loan may differ from lender to lender, one thing that they all have in common is the requirement of a ‘good’ CIBIL score.

What is a CIBIL score?

A three-digit score that indicates an individual’s creditworthiness, the CIBIL score is crucial when it comes to applying for a loan or credit card. When a lender evaluates your loan application, the first piece of information they look at is this score.

Why is a CIBIL score required?

Typically, a score is between 300 and 900, and higher the score, better are your chances of the application being approved. A lower score may indicate that a person relies heavily on credit to make ends meet, and hence a lender may be reluctant to extend fresh credit, as chances of the loan going ‘bad’ or delinquent are higher.

Factors affecting the CIBIL score

Now that we know what a CIBIL score is, let us look at the factors that affect the score:

  • Timely payments on outstanding dues, be it towards an existing loan EMI or credit card

  • Making complete payments on outstanding bills

  • Non-payment or late payment of bills and EMIs

  • Consistently utilising a high credit limit, i.e. either maxing out on the assigned limit or close to it

  • Regularly paying only the minimum due on credit cards

  • Having multiple lines of credit at the same time, especially if unsecured loans or credit cards

While some of these factors affect the score negatively, others can have a positive impact on your score.

CIBIL score and loans

While CIBIL scores are important for any loan application, they assume special significance in the case of personal loans. This is owing to the fact that personal loans are unsecured products, and is therefore more of a credit risk for the lender.

A lender is more likely to approve a loan application for someone with a higher score, which with CIBIL is normally considered to be 700 and above. A ‘good’ score indicates an individual’s responsible behaviour towards credit, and hence it may be worth lending to such a consumer.

CIBIL TransUnion Personal Loan Score

In addition to the CIBIL TransUnion score that is used by banks and other financial institutions when determining whether to approve a loan application (for example, a home or auto loan), there is also the CIBIL TransUnion Personal Loan score that lays special emphasis on any unsecured loans or credit cards that an individual may have in their credit report.

The repayment behaviour on these loans is carefully studied, and a score is arrived based on the same. The score will provide information on the likelihood of the customers becoming 91 days delinquent on a personal loan. This helps a lender make an informed decision, whether to approve the loan application or not.

How to better your CIBIL score

In addition to using credit wisely and making timely payments, check your credit score regularly. This will help you identify any irregularities in your credit report, and these can be rectified once brought to the attention of the credit bureau.

If you still need assistance to improve your score, consider availing of the services of a credit health management company, who will work closely with you to not only improve your score but enhance it over time.

Do keep in mind that for your loan application to go through, being credit healthy is non-negotiable, and the best time to start is now.

How to Check Loan Eligibility for a Particular CIBIL Score ?

CIBIL Score is one of the most crucial factors when it comes to decision making (by the lender) regarding who to lend to for most loans but not for all. CIBIL score allows the lender to decide which loan applications to accept and which to reject. Having said that it is important to remember that different lenders have different threshold levels at which they are willing to lend. Also for different types of loans the level of CIBIL score acceptable will also vary. For some types of loans CIBIL score is not even considered.

So while a bank may be willing to sanction an auto loan at the CIBIL score of 650 the same bank may not consider sanctioning a personal loan at that CIBIL Score. Again another lender may sanction a personal loan at the level but with a higher rate of interest. Loan for low CIBIL score is a possibility but this option is an avoidable one (this is explained in later part of the post).

The chart below explains how loan eligibility and Credit score are related.

Type of Loan:

As discussed earlier the type of loan is an important factor that determines if a particular CIBIL score is acceptable. Generally for loans that are asset backed a lower CIBIL score might be acceptable when compared to a non asset backed loan. In the case of an asset backed loan the lender has some asset to fall back on, for recovery but in an unsecured loan this is not possible. For a few types of loans like gold loans, loan against deposit or insurance policy or securities the lender will not even consider the applicant’s credit score. Depending on the asset and the lender’s policy 70% to 90% of the asset value is sanctioned as loan and the asset is mortgaged to the lender.

In case of a personal loan the lender has nothing to fall back on; in such a scenario they would be very stringent about who to lend to and will like to lend to those with a very health credit score.

Lender’s Policy:

Each bank decides at what score they are willing to lend as per their polices and guidelines. Generally mainstream private and public banks will be less flexible about this parameter. Private lenders, co-operative banks and HFCs etc might be more flexible when it comes to credit score. They might choose to overlook the credit score in case the prospective borrower has a deep, long relationship with the bank, or if there is a guarantor involved or they may be willing to lend at lower scores as a policy matter or with a higher rate of interest.

Applicable Interest:

The credit score impacts the applicable interest rate that a customer has to pay for the loan. Lenders charge interest for allowing a borrower to use the money that is not his/hers and also for the risk they undertake when lending money. A higher risk profile is reflected by a low credit score; thus a lender might charge a higher interest and the converse is also true. Thus for a lower CIBIL score the borrower may be forced to pay a higher interest.

To Borrow or Not to Borrow with a Low Credit Score?

If you have a low CIBIL score the first thing to consider what type of loan you require. It is also a good option to consider loans that do not require a credit score as an eligibility criteria (examples discussed above) in case of a low credit score.

Some types of loan and lending institutions have room for flexibility so the borrower can explore the option of approaching a co-operative bank or make use of a guarantor or a co-borrower.

If the above is also not feasible then we come to the option of paying a higher than the prevalent interest and borrow from private lenders. This option is ideally avoidable as these loans are very expensive.

Ideally one should focus on keeping their credit score healthy and before borrowing try and start working a couple of months in advance to improve credit score. A low credit score indicates that all is not well with the financial health and adding debt is not a good idea in such a scenario. Instead of borrowing at exorbitant rates it’s better to try and improve your credit score and then borrow once things have improved. Loan eligibility for a particular CIBIL score is not universal; generally a score above 750 is considered good. For scores lower than that the type of loan, the lender’s policy and the borrower’s willingness to pay higher interest determine whether a loan will be sanctioned or not.

What is more effective for my CIBIL score – Credit Card or loans?

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When the credit scores are getting calculated, the ratio of the type of credit facilities being used by me come into consideration. What this means is, any person servicing loans and credit cards, should have a healthy credit-mix of secured and unsecured loans. ‘Secured loan’ means a loan where the loan amount is covered against a security pledged by the borrower with the lender. Examples are home loan, loan against property, education loan, secured credit card, automobile loan. Unsecured loan means a loan where the borrower does not need to deposit any asset as a guarantee against a loan taken. Examples are personal loan and credit cards. Both the types of loans have a bearing on one’s CIBIL Score.

Let us understand the credit mix matrix of loans, which is an important factor in the process of underwriting.

There are two types of trade lines in loans – fixed and revolving. Revolving trade line means, those that do not have a fixed monthly payment. Fixed trade lines means, those that require fixed monthly payments until the loan is completely paid off. Credit cards are known as revolving trade lines because the amount to be paid is not fixed and the credit card holder can chose the pay back only as low as 5% of the total amount due and rest at any point of time within the next month. Equated Monthly Installments are fixed and a pre-decided amount needs to be paid back to the lender on a particular date of every month.

Both [credit cards and loans] are about the same, they are equally impactful on the credit score and on credit tracking. Let’s understand this better with examples.

A person is servicing a few loans [irrespective of loan segment], and a few credit cards. They may be paying off all dues on the loans, properly. But, possibly, defaulting on their credit cards on payments and usage. In that case, it is not that their score will be good because their loan servicing is good. But, because of their improper payments against credit cards, their credit score will drop down.

Similarly, in a vice-versa case, where a person servicing a few loans every month is making credit card payments on time, but in some way, is defaulting on loans to be serviced. In this case too, their credit score would not be good considering only the loan history.

Credits and loans are one and the same thing. Which is, borrowing money from a lender, for a certain period, promising to pay back within a certain time frame, at an amount agreed upon.

Therefore, both credits and loans have an equal effect on the CIBIL score or credit score. None is more effective than the other.

What are credit bureaus

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Mrs. Bakshi works for the IT sector at a senior position and draws a monthly income of INR 1,30,000. She is servicing three credit cards, one education loan for her daughter and a car loan. All of these have been procured from different banks. She now wants to know her performance on all of these loans and also wants to find out, how much is the outstanding on her loans and credit cards, to manage her finances properly.

What would she do to procure information on her loan accounts from all these banks? Run around to all the banks and ask for information?

Well, there is a single window / platform from where, this information about multiple loan accounts can be procured. It is known as ‘credit information bureau’. In India, the most well-known bureau is Credit Information Bureau (India) Ltd. Abbreviated as CIBIL. Let’s know more about these ‘credit bureaus’.

Credit Information Bureaus are the repository of credit and loan related information of borrowers. This is the information submitted by banks and lending institutions to the bureaus – about those customers who have – either single or multiple – loan accounts.

A customer who has multiple loan accounts at different banks, and wishes to draw information on all of those, may find it challenging & time consuming to do so. Whereas, if there is just one institute that provides all the information on all loan accounts of a particular customer, it is very convenient and also quick to seek such information.

This loan account information is known as “credit information report” and is prepared by credit bureaus based on the details submitted by the banks / NBFCs. A credit report can be of either individual customers, business enterprises or organizations & institutes. On the basis of information submitted by the banks, the credit bureaus compute credit score that marks the credit worthiness of the account holder.

How can one single bureau have all the information of Mrs. Bakshi’s loans and credit cards?

All the banks who lend money in the form of either loans or credit cards, have to compulsorily submit such information to the credit bureaus on a regular basis. Hence, any bureau will have all the information on a particular customer’s credit history whether it is a loan or a credit card; or whether they have taken loan from a single bank or more than one bank.

Is there only CIBIL or are there more credit bureaus in India?

There are four Bureaus operational in India, to whom all the banks report their loan information. Credit Information Bureau (India) Ltd. or CIBIL , Equifax Credit Information Services, Experian Credit Information Company and Crif High Mark Credit Information Services. A customer can seek their credit report from any of these bureaus. These credit bureaus charge a nominal fee to provide customers their credit information report and credit scores.

CIBIL charges INR 500.

Equifax charges INR 400.

Experian charges INR 400.

Highmark charges INR 300.

Many people wrongly believe that a bureau will provide them their credit information for free. There is no such a thing as free credit report or free credit score. One has to pay for such service.

Debt And CIBIL Score

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Debt and Credit Score (known as CIBIL score in general) are related closely. Debt affects credit score and your credit score affects your eligibility to get fresh debt. Whether you have to apply for fresh debt or already have some existing debt, it is always important to remember that these are long-term decisions and have far reaching impact on the credit score. Not only do existing loans have a bearing on the CIBIL Score even debt enquiries impact it. Below we explore the various aspects of the co-relation between debt and credit score.

Existing Debt and Credit Score:

Whether its credit card dues or various loans they contribute towards building your credit score. The total debt you have, how you treat the payments all have affect in varying degrees.

  • Payments: If EMI payments and credit card installments are paid on time they have a positive impact on your CIBIL report. If the contrary is true then obviously the impact will not be favorable on the credit score. The older your credit trail the better it is.

  • Combination of Debt: Debt is not something that needs to be avoided; after it is debt that gives you a credit score. How much debt (discussed below) how you treat it (discussed in point A) and the combination determine your credit rating. The right mix of secured loans (home and car) and unsecured loans (personal and credit card) affect the credit rating positively. Too much dependence on your credit card; paying only the minimum amount due frequently and utilization of the credit limit to a high extent all are detrimental for your credit history. This aspect needs careful thought. Having only unsecured loans is not beneficial for the credit score.

  • Debt to Income Ratio Is Also Important: This is the ratio of your total monthly debt to your monthly income. The debt to income ratio should not exceed ideally 40%. Though it does not impact credit score directly but keeping this in mind will help you in managing your debt better.

Debt Enquiries:

Not only debt about enquiry about fresh debt also impacts your credit score. When you apply for any loan the concerned bank will run a credit enquiry. Too many enquiries mean that you have either applied for too many loans or that your application has been turned down too many times. This has a 10% weightage when calculating the credit score. In case you are wondering about how to improve your credit score then make sure that you don’t apply for a loan without giving it the required thought and consideration.

How Credit Score Impacts your Eligibility for Fresh Debt?

Though Credit Score is a reflection of your credit history it has a great impact on your eligibility to apply and get fresh debt. Defaulting on payments of past loans or credit card dues and similar other factors lower the credit score. A low credit score is a red flag and can cause your loan application to be rejected right away. While a good credit score not only ensures that you are able to get a fresh loan (it’s after all the basic requirement) but also ensures some other advantages. A high credit score can get you faster processing of loans, some concessions like a better rates and fee waivers (though these are not guaranteed). A low credit score (not beyond the threshold) can prompt the loan provider to offer loans at a higher rate. All loan providers may not give you a loan (as each has a different threshold score) which can cause delay in processing and can also cause you to lose money in the form of application fees.

So with debt and credit score it’s a two way street. Your existing debt and its trail has impact on the credit score and your credit score in turn impacts your eligibility for fresh debt.