Mistakes to be avoided when trying to improve CIBIL score

A credit score is something that reflects your credit history and thus it is something that cannot be built or destroyed in haste. A lot of factors contribute in making or breaking your credit rating. Being a responsible borrower is the simplest way to having a good cibil score; but if you have not done that then you will have to work on trying to get a better score. While there are certain things that can help you build your score, there are some other aspects that can pull it down. So here is a look at few things to avoid if you are looking at improving your score.

  • Excessive Use of Credit Card: Credit cards are a great convenience but their use may often be criticized as one can easily go overboard and regret it later. However one may think that if they manage to pay their full dues on time the credit card usage will never cause a problem, but this notion is wrong. Using your card judiciously is important if you are looking at improving your score. This means that you need to limit your credit card expenditure per cycle to 40% or less of the sanctioned cared limit. This is known as credit utilization ratio and this needs to be calculated per card wise as well as for all cards put together in case of multiple cards. High credit utilization can harm the score as the user appears to be credit hungry.
  • Making too Many Inquiries: When you apply for a loan, the lender seeks your CIR from the credit agency which is known as a hard inquiry. Each hard inquiry is recorded in the CIR and impacts the score negatively. Thus if you truly require a loan then make sure you research well before you actually apply for a loan. This will ensure that your loan application is not rejected which will eliminate the need to apply for a loan elsewhere. So for example if you want to buy a new car and need a loan for it, then carefully research about car loans Check which lender offers loans at what rates, what is the LTV ratio, what are the documents required, at what credit score they are willing to offer loans and so on. You should then approach a lender who you know meets your requirements and who will be willing to lend to you based on your rating and profile. Refrain from making unnecessary enquiries.
  • Settling an Account: Consider an example to understand this aspect. Priya is looking at improving her credit score so that she can apply for a home loan next year. She goes through her CIR and spots an old credit card debt; she decides to take care with an aim of improving her score. She got in touch with the credit card company and she paid the dues after some negotiation. Hoping to see her score improve she got her CIR but was dismayed that it had reduced further. If you are as confused as Priya that why did this happen then we have an explanation. When you pay old dues then the fate of your score depends on how this repayment is reported. If the account is reported as settled then it could mean trouble as it will raise a question mark in the minds of all future lenders about getting their money back in full. If the debt is reported as simply being paid then it will have an opposite impact.  
  • Guaranteeing a loan without thinking: Sometimes an applicant may find it difficult to get a loan on his/her own due to lack of proper documents, low score, not meeting the eligibility criteria and so on. In such a scenario they may ask someone to guarantee their loan. Well this can definitely ease out the problems for the person seeking the loan but may cause the guarantor to land in a tricky position without realizing so. If the applicant fails to pay his/her dues on time then the guarantor may be asked to do soon. What’s more each delayed payment can harm the score of the guarantor as well. So though you may be servicing all your loans on time you score may still be low because of a loan you guaranteed. Thus if you plan to guarantee a loan, do it after being sure about the applicant, you own ability to service it in case the applicant fails to so and also after you are sure about its impact on your own credit score.

Often small things can cause your score to dip. Thus make sure you steer clear from the above mistakes if you want to be credit healthy.

 

How to enhance your loan eligibility

Every bank follows a credit appraisal process in order to determine a borrower’s loan eligibility. It checks the CIBIL score of an individual, and assesses the CIBIL report, income and other documents to determine whether the borrower is capable of repaying the loan on time or not. By working on the credit profile and improving credit score one can increase the chances of approval.

Here are some ways that can help you increase your loan eligibility.

Longer tenure of loan– Repayment capacity of the borrower is a major factor that banks consider before sanctioning a loan. If the monthly instalment is higher than what the bank thinks you can afford to pay, then your eligibility will be affected. Opting for a longer tenure will reduce your EMI liability and enhance your eligibility. Though a longer tenure will increase your net interest outgo it will at least make you eligible for the loan. 

Additional income-Showcasing that you have a high steady income helps to increase your loan eligibility. Keep a record of the variable perks or performance linked pay that you earn from your job and add them to your income. Mention the other sources of income such as high interest fixed deposits or rental income on the property that you own. Such additional sources of income will enhance your repayment capacity and increase the amount that you are eligible for. You may need to furnish supporting documents as proof of the additional income. So keep them handy.

Step-Up Loans- Step-Up loans are a great way to increase the loan eligibility. For people who are in a profession where there is struggle in the initial years, but surety of a good financial status going forward, this is an easy way to borrow funds. Here an individual pays a lower EMI in the initial years. The EMI progressively increases with the tenure of the loan. Here the eligibility increases as the future income is expected to increase as the borrower establishes himself in his profession.

Prepay-existing loans- If you are considering taking a home loan, then prepaying your outstanding loans like a car loan or a personal loan, is a good way to enhance your eligibility. The EMI that you are already paying on the existing loans reduces your monthly repayment capacity and impacts the home loan amount that you may be eligible for. For example if your monthly income is Rs 1 lakh, the bank may consider your repayment capability as Rs 50,000 as EMI. But if you already have a personal loan where the EMI is Rs 20,000 this will be deducted from the amount that you can afford. So to arrive at the eligible amount, the bank will consider your affordability as Rs 30,000. Hence it is advisable to prepay these loans before making a home loan commitment.

Co-borrower-The assessment of the repayment capacity of the borrower largely depends on his income.  The EMI is generally half the take home salary. But if it falls short of the required limit you can bring in a co-applicant. If your spouse is earning, then it is a good idea to make a joint application. Pooling two incomes together enhances the loan eligibility amount to a great extent. This also means that the liability of repaying rests on both the applicants.

 Work on your CIBIL score- CIBIL score is an important factor that determines loan eligibility. Hence you should make all efforts to improve credit score. Check your CIBIL report and score regularly. If you notice an errors then dispute them immediately. Pay your monthly instalments and credit card bills on time. Use your credit card wisely. By keeping the utilization levels below 30% of available credit limit you will ensure that you improve credit score.

When you work on the important aspects (like income and credit score) that the bank evaluates in order to make an assessment, you can surely enhance your loan eligibility.

 

Reasons why errors on your CIBIL Report can be Destructive

Priya wanted to gift a new card to her parents on their anniversary. She chose the car, model and color keeping her parent’s choice and requirements in mind. She then applied for a loan, she knew it would not be difficult to get a loan as she had all the required documents and she had also maintained a good credit history. Her loan was rejected due to a low credit score and she was almost shocked as she had always been a responsible borrower. On going through her Credit Information Report she was shocked to see that there were delayed payments reported in it. She had never missed a payment and it turned out it was a reporting error by the lender.

So Priya missed a chance to gift her loved ones at the right occasion, this could have been avoided if she had been pre-emptive and had applied for a free CIBIL Score and checked if the score is acceptable to the lending agency. Despite being meticulous in her credit habits she had to face some problems.

How can errors in your CIBIL Report be Destructive?

While for Priya it was disappointment, a low CIBIL score can cause bigger problems too. It can result in financial loss, missed opportunities and a lot of wasted time and effort for no fault of yours. Being credit healthy is important and it could be doubly distressing if despite being a careful borrower your score is low due to an error in the report. While these errors can be rectified and once they are removed from your report they will enhance credit score but sometimes the delay can cause a lot of trouble and loss too. These errors could be wrong reporting of a default in payment, a loan or credit card that does not belong to you being reported under your name which will reduce your borrowing capacity and if there have been any defaults on that loan they will also be include in your score calculation.  Here are a few ways in which these errors can be destructive:

  • Cause Loan Rejection: If a lender reports that you have missed a payment or the loan is reported as settled erroneously then this could cause some serious trouble for you. Not only your credit rating will take a hit, a look at the CIR will scare away the lenders. No lender wants to lend to a person who does not pay on time or is a default risk. Thus the lender will not know that the reporting in the CIR is erroneous and they will reject your loan application without a second though whatsoever.
  • Harm your Job Prospects: This may not seem like the most obvious impact of an error in the CIR but could be more harmful then getting a loan rejected. Imagine not getting the dream job or losing out to a competitor in the final round of interviewing due to an error on your report which can cause you to appear like an untrustworthy candidate or somebody who is debt ridden. Increasing number of employers are seeking credit check of prospective employees along with a background check and a health check. This is to ensure that the employee that they hire is trustworthy and will not get into legal trouble due to unpaid dues. Thus an error could cost you dearly at a job interview.
  • Credit Card Application Rejection: An error in the CIR could also cause a new credit card application to be rejected. If your CIR show you have a high utilization ratio, missed payments or have a “settled” status account in your report even erroneously it could lead to the card company rejecting your application. While you can certainly apply for the card again after rectifying the error but sometimes the delay can cause more than expected trouble.
  • Make a loan more expensive: Errors on the CIR can lower your scores which can cause lenders to assume you to be a high risk borrower. This can make them charge you higher interest rates on loans then they would have charged otherwise. Higher the risk, higher the interest you are charged so you can end up paying more interest on a loan for no fault of yours.

The best way to avoid getting into a situation like this is to get your credit report from time to time so that you are aware of any errors in it and get sufficient time to rectify it. This will ensure that you do not suffer any losses because of these errors.