Do banks check the CIBIL score before loan approval? Here’s what you should know!

Your credit score is a huge determining factor when it comes to loan approval. It is one of the first things that a bank or financial institution checks when you approach them, making it an important aspect of your financial life that you just can’t afford to ignore. Of course, your complete profile will also be considered, but do take special care of your score.

A good starting point would be to get a free CIBIL score from the credit bureau so that you know where you stand. This is an especially crucial step prior to loan application. Read on to know more about the credit score, and how it impacts you.

What is a credit score?

A three-digit number between 300 and 900, the credit score is generated by a credit bureau. It is a crisp overview of your credit report, which tells a lender about your creditworthiness. A high or good credit score can open doors in the financial world for you, when it comes to making an application for a loan or credit card. While every lender’s criteria may differ slightly, there is no doubt that a score of 750 and above will make anyone sit up and take notice!

What goes into a credit score?

Wondering what are the parameters at play when it comes to your credit score? Read on to know more!

  • Payment history on past as well as current loans and credit card accounts

  • New credit that you have availed of

  • The length of credit history, i.e. how old your accounts are

  • A credit mix, which consists of various debt products

  • The credit utilisation ratio, which indicates just how much you seem to rely on credit

Other factors that banks consider

In addition to the credit score, banks also consider certain other factors such as your income and the amount you currently owe on existing loans and credit cards. They also look at the amount of loan you have requested for, together with the loan tenure. Whether your application is for a secured or unsecured loan will also have a role to play, especially keeping in mind your income and expenses.

However, here’s why the credit score is important. Say for instance you apply for a personal loan for low CIBIL score. Here, a bank may not reject your application outright because of the other factors being considered. However, a low score may not give a lender the confidence to offer you the best rate of interest since they too need to hedge their bets.

How to improve your credit score

Given the above, you’d agree that it is indeed important to make sure that your credit score is not just high but that it remains that way as well. Here are some crucial tips that should help you on your journey to improve your credit score.

  • Making payments in time: Being late on your credit card and loan payments can pull your score down. The situation is further complicated if you skip making the payment entirely, as this looks alarming from a lender’s perspective.

  • Do not default on loans: Charged off or settled loan and card accounts reflect negatively on your credit report, as do accounts that have gone into collections. Do make sure that you work out a solution to repay existing debt if you don’t want your score to dip drastically as a result of these charges.

  • Maintain old credit cards: Don’t shorten the length of your credit history if you have a good, old card account. If you have maintained it well by ensuring timely payments, this can in fact give your score a boost.

  • Applying for fresh credit: It’s simple, really – if you don’t need a loan or card, don’t apply for one! Not only does it make you look like you’re constantly in need of credit within a short interval, but every such application results in a hard enquiry on your credit report. This impacts the score, albeit temporarily.

  • Apply for a credit card: The above doesn’t hold true if you want to start building a credit score, however! Apply for a new card and be sure to use it prudently – this can instantly help boost your credit score.

  • Check your credit report: At regular intervals, do make sure that you check what’s in your report, because any erroneous or inaccurate information can prove detrimental to your score. Further, you need to make sure that every account mentioned therein belongs to you – protect yourself from identity theft even as you protect your credit score!

In conclusion

It’s important to remember that while a personal loan for low CIBIL score is not impossible, it is also not optimal at the same time. Instead, with some perseverance and patience it is better to improve your credit score.

Start with availing a free CIBIL score from a credit bureau today, so that you can take charge of your financial health confidently, now and well into the future!

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Let’s find out interesting facts about credit score that you didn’t know

Credit score itself is an interesting topic. The whole logic, algorithm, how is it calculated, what factors are associated with it. All becomes one big score that is required to check the creditworthiness of an individual when he or she has applied for a loan or credit card to either the banks or the NBFCs (Non-banking Financial Institutions). For the basics, A Credit Score is a three digit number ranging between 300-900. Where 300 is the lowest and 900 is the highest. The score between 750-900 is a good score. Between 600-750 is considered as an average score and anything below 600 is bad.

There are four credit bureaus in India who gives credit scores. CIBIL (Credit Information Bureau India Limited), Experian, Equifax and CRIF Highmark are these four bureaus. These credit bureaus have the authority to access an individual’s credit history as they have the communication channel set with the banks and NBFCs (Non Banking Financial Institutions) who passes the information of when was the loan or a credit was applied to when it was approved to when it was disbursed and finally when they do they start repaying. Any missed or delayed payments, are all recorded and obviously which affect the score!

Payment History, Amount Owed, Credit Mix, Length Of Credit History and New Accounts are the five factors of which the credit score is made! We all know that. We have read many times about these criteria or the parameters and how they can make or break the score. The free CIBIL Score that is offered also helps anyone know the score and a detailed report wherein one can check the mishaps that must have happened if the score has gone low or anything related. But let’s know a few things beyond that. And what are other factors that one can take care too!

The first that comes is the credit utilization ratio:

What is the credit utilization ratio?

If you are a credit card user, you would know that there is a credit limit to the card which is assigned to you. Now, the credit limit given does not necessarily mean that use the whole of it. Practice shows that people who used a maximum 35% to 40% of their credit limit of the credit card, helped them keeping the score batter and on an average increasing the score. The logic is that it shows that the user is not credited hungry and is responsible enough to use some amount of the credit available. In such a case, if your utilization is high, try and get one more card and manage the balance or you can always clear the outstanding and revive the credit limit.

Secured Loans:

Secured loans or secured credits gives the financial institutes an idea that there always is a backup just in case if there is an emergency and you may just not be able to pay off the loan. A Car loan, Gold loan are some such small amount example of loans and secured credit card which is obtained against the FD that is kept to get that credit card are some of few hacks and tricks you can follow to get a better score.

Investing in something and from the interest received, pay the EMIs:

Now, this is one very interesting concept. Say you have X amount of money with you. If you are buying a home or a car or want to go for higher education or maybe send your kids for the education if you are that age, keep that amount as an investment. Take a loan for the work and manage in such a way that from the interest received from that investments, you can pay the EMI of a loan. In such manner, you can have the money safe, invested and with a new loan account, all the factors of the credit score are also covered helping you increase the score!

Follow these simple interesting hacks related to credit score which you probably didn’t know!

How Does Different Credit Bureaus Work

Before jumping to the main topic, Let’s know that what is the credit bureau? And what mainly does it do. A Credit Bureau is an organization who generates and maintains the credit score and credit report of any individual. These both are nothing but a direct reflection of how credit responsible any individual is. There are various factors which these bureaus determine while generating, updating, and maintaining the score and the report. Various algorithms are working on the credits and the repayments of credits any individual has taken and is repaying. It also majorly depend upon the banks or the NBFCs who update them with anyone’s proceedings of the credits. If in case, a bank or an NBFC fails to do so, it directly affects the score.

Everyone who has dealt atleast once with credit score or credit report knows what do they both mean. A score is a three-digit number between the range of 300-900 which is obtained by calculating various factors and report is the detailed information about the accounts. Where are the credit bureaus and how many of them will know the information? In India, there are 4 credit bureaus viz. TransUnion CIBIL, Equifax, Experian and CRIF HighMark. The first ever bureau was TransUnion CIBIL which was established in 2000 with the association of TransUnion, An America based Credit Bureau. CIBIL stands for Credit Information Bureau India Limited. Over the next few years, other bureaus came and established themselves. In 2010, RBI(Reserve Bank of India) passed a mandate that each and every bank or an NBFC(Non-Banking Financial Company) has to update any information regarding the credits which includes any type of credit card or loan of an individual to the credit bureaus.

Credit score consists of 5 parameters.

• Payment History

• Amount owed

• Length of credit history

• Credit Mix

• New Credit

Check the following table which determines the weightage of each of the above-mentioned parameters in respective credit bureau.

TransUnion CIBIL

Equifax

Experian

CRIF HighMark

In Percentage(%)

Payment History

35

35

35

35

Amount Owed

30

30

30

30

Length of Credit History

15

15

10

10

Credit Mix

10

(Inquiry) 10

15

(Utilisation)15

New Credit

10

(Accounts in Use) 10

10

10

Now, as per the details mentioned above, the 65 percent of any credit score comprises of the payment history as in how responsible the person has been over past years in making the payments of the credits s/he had been taking is considered. The amount owed is how much is the total credit anyone has taken, this includes the credit card limit as well as a loan. And the rest three factors revolve around the total length of credit history i.e. from how long has an individual be taking credits, credit mix i.e. what kind of credits one has. Secured or unsecured and revolving based on fixed credits. New credits are the new type of accounts (not be mistaken by bank accounts) or the credits which one opens. In here, Equifax has a different name as Credit inquiry which is the number of times one has inquired about any kind of loan or a credit card. The loan would be any of the loans like, home loan, education loan, car loan which are basically unsecured types of loan. And the accounts that are in use. Also, CRIF HighMark considers the credit utilization instead of credit mix.

There is no much difference between any of the factors which determine the score. There is hardly 5 percent change. So when the credit score is calculated is more over the same with just 20-25 points change. There can a major difference when a bank would not update any of the bureaus about a transaction. That can happen sometimes, that a particular bank would update the information to 3 bureaus and skips one or there is no tie up with any of the individual bureaus. When anyone checks the detailed report, it can found about which information is missing. Majorly if there is any change, it would be of 50 points maximum and shouldn’t we worry about, as taking the above points into consideration.

But, one should always be responsible for his/her credits and should not take them casually. The weightage may differ in any of the bureaus of the parameter but, an individual’s behavior would make the creditworthiness better or worse. So, one has to be mature enough in taking the credit repayments seriously!

New updates on credit report and score from the RBI

The concept of credit reports and credit scores has been fast gaining acceptance in today’s financial scenario in India, with all lenders using the model to determine whether to extend credit to a customer, or reject an application for a loan or credit card.

While globally the usage of credit reports has gone beyond financial services and extends to employment and even property rental, in India we continue to use reports primarily when it comes to lending. To this end, the Reserve Bank of India (RBI) has been working on the guidelines that need to be followed with respect to credit bureau products and has been revising them periodically.

India’s first credit information company, or credit bureau is CIBIL, and is the oldest having commenced operations in the year 2000. Subsequently, the other bureaus licensed to operate in the country are Equifax, Experian and CRIF High Mark.

In the nascent stages of credit bureau inception, the Credit Information Companies (Regulation) Act, 2005 (CICRA) was operationalised with effect from December 14, 2006. As per Section 15(1) of the Act, every credit institution had to be a member of at least one credit bureau within a period of three months from commencement of the Act. This applied to cooperative banks as well, as they fall under the definition of credit institutions as defined by the Act. This included data sharing by institutions to the bureaus, as a bureau relies on its members to provide information.

Subsequently, in January 2015, the RBI modified this circular, and as per the revised circular as per Section 15 of the CICRA, every credit institution (Non-banking Financial Companies (NBFCs) and banks included) would need to become a member of all the bureaus and moderate the membership and annual fees suitably. With bureaus dependent on their member institutions for data, there is likelihood that credit history of an individual related to non-member credit institutions would not be reported. This would result in incorrect/ incomplete information across bureaus, and the effective solution to streamline the process would be to mandate membership for all institutions. One-time membership fees to be charged by the bureaus to credit institutions cannot exceed Rs. 10,000 each, while the annual fees cannot exceed Rs. 5,000 each.

With membership comes the question of submitting data to credit bureaus on the part of member institutions. A Committee to recommend data formats for furnishing credit information to credit information companies was constituted by the RBI under the aegis of Aditya Puri, MD, HDFC Bank. On examination of the recommendations of the Committee, it had been derived that increased recognition of credit reports is required, especially by Regional Rural Banks (RRBs), State Cooperative Banks (StCBs) and District Central Cooperative Banks (CCBs), to ensure better screening of loan applicants and usage of credit information reports in credit appraisal. Hence, bureaus would now need to hold regular workshops for these institutions.

Further, the Committee also recommended that RRBs should, as part of their credit appraisal process, have suitable provisions for obtaining credit reports from one or more bureaus so that the credit decision is based purely on information available in the system.

On a related note, the databases currently available with bureaus are not adequately populated with data pertaining to commercial borrowers, and hence member institutions are required to report this data to the bureaus in a timely manner, for bureaus to upload this data within a six-month time frame.

To streamline the process still further, standardisation of data formats had been proposed by the Committee for consumer and commercial borrowers. This would be submitted in a non-proprietary reporting format known as the ‘uniform credit reporting format’. A Technical Working Group would be sent up to regularly review the same and suggest modifications as required. However, those NBFCs registered with the RBI as core investment companies, primary dealers and those solely into investment activities without any customer interface are exempt from this inclusion.

The RBI had also requested for changes in reporting data to bureaus for defaulters (Rs. 1.0 crore and above) as well as wilful defaulters (Rs. 25.0 lakhs and above), wherein additional information regarding the PAN number has to be included.

In conclusion

The RBI has been reviewing and monitoring the usage of bureaus as well as the practices adopted by them and member institutions both. With better governance and uniformity of processes, the road ahead for credit information companies looks positive.