By Priyanka Sambhav
When you apply for a loan, your past financial behavior plays an important role. There is a background check of your financial reputation- which means lender looks at debt repayment history, kinds of loan that you have availed in the past or do you have any ongoing loans.
When a lender makes funds available to the borrower, he wants it to be returned. To test the borrower’s payback capability, the financial institutions assess Credit Information Report (CIR) also known as the credit score which is based on data collected from lenders. This makes the borrower understand the creditworthiness of a borrower. Higher the score better are the chances of getting a hassle-free loan.
4 credit agencies in India provides credit score namely TransUnion CIBIL Experian, CRIF High Mark and Equifax. CIBIL was the first company to start this and gained so much of popularity that CIBIL became synonymous of the credit report.
How is Credit Score achieved?
A credit score is an assessment of a person’s financial behaviour, and it is a 3-digit number which ranges from 300 to 900. The closer your score is to 900, the better are your chances to get the loan approved.
This score is calculated based on four components: payment history, credit mix, multiple enquiries and credit utilization.
Around 50% of CIBIL score depends upon credit mix and credit exposure. Credit mix implies the number of secured and unsecured loans that you have. Credit exposure is the measurement of the maximum potential loss to a lender in case you fail to repay the loan. It also takes into consideration your outstanding credit. Your credit utilization behaviour is also an essential factor.
Other factors impacting the CIBIL score is how you are using your credit, timely repayment of loans, and how much credit you have used in the past two years.
However, a high credit score doesn’t guarantee a loan and neither a low score will end the chances of securing one.
Loan Restructuring & Credit Score
The COVID 19 pandemic has hurt repayment capacities of many borrowers, and they may be planning to opt for loan restructuring scheme. Those facing difficulty in servicing their loans will get an extended window of two years to repay the loan. As part of the restructuring exercise, RBI has allowed a two-year moratorium benefit to COVID19 hit loans. This would immediately lighten the loan burden but do note that banks will report these loans as ‘restructured’ loans to credit bureaus and will have an impact on the credit score of the borrower. Though banking experts feel that even if borrowers have to take the restructuring and their credit score dips, they need not worry if they repay the loan in a disciplined manner. For future loan eligibility instead of the credit score, it will be the credit repayment history of the restructured loans that will be the deciding factor.
Do this to keep your credit score healthy
Here are a few tips that can help you –
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Make payment timely whether loan EMI or credit card dues pay on time.
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Keep a balance between secured & unsecured loans. Secured loans include home loan, auto loan, etc. Unsecured loans include credit card payments, personal loan without a mortgage, etc. Avoid multiple loans in shorter period.
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Do not excessively seek credit or you may give the impression of a ‘credit hungry’ borrower. Moderation is the key.
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Control your credit utilization. Ensure lower utilization than full and going over-limit will have an adverse impact.
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Monitor your co-signed, guaranteed, and joint accounts too. A credit default by someone else on whose loan you are just a guarantor will be not good for your score.
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Always borrow in line with your payment capacity.
Keeping an account of your credit performance and CIBIL score on a monthly or quarterly trench will help you understand and reform your financial behaviour for the better. It will come handy when you will be applying for loans as you will know your profile better.
