A lot of times, individuals avail loans (usually unsecured loans) and find it difficult to make the payments as they thought they could, initially. They even end up trying to run away from their financial responsibility by running away from the city or country. In such a case, the financial institution marks the loans as ‘Write-off’ and the individual is blacklisted in the CIBIL records. Another similar scenario is if an individual pays back only a part of the total amount and then defaults the payments. In this case the loan is marked as ‘Settled’. In such cases, banks remain extremely cautious while analyzing the individual’s future applications as they see him/her as a risk and thus end up rejecting the application.
Banks, in fact, set your credit based on your salary, your spending habits and your repayment history. You can avail more than your credit limit but you have to pay a fee, known as “Overlimit charges”. In order to give a personal loan at competitive interest rates, banks/NBFCs prefer customers with over 750 CIBIL score. These customers enjoy better rates and higher loan amounts in comparison with those whose score is less than 750. This is a fact most people are unaware of despite the information overload about credit score and its impact.
For financial institutions, a good credit score and credit history of the prospective borrower play a pivotal role in taking the decision to lend the loan. The bank also relies on the score to decide upon the rate of interest to assign against the borrower. Usually, credit score is generated based on an individual’s financial behavior with a bank over any loan or debt settlement. This financial behavior includes credit card payment record, dues and other kinds of debts.
However, if you’re one of those who are confused or worried about their CIBIL score, here are five tips for you to keep your track record clean:
Never miss your payments: Never be late or default on the payments of your car, personal or home loan EMIs. A late payment or a default on your car loan, personal loan and your home loan EMI means your credit score goes low. Credit cards allow you to escape a late penalty fee by paying a minimum amount on your credit card. In spite of paying the minimum amount, interest on your credit card accumulates and soon it goes so high that you keep defaulting on your payments. In this case your credit score automatically goes down.
Don’t keep applying for credit if rejected: If you have applied for a loan or a credit card and your application has been rejected, the information will be recorded in your credit report. If you go and apply to another bank immediately, then they will see your low score and the previous rejection and may reject your application. The best thing to do in such cases is to not apply again and wait for the score to improve.
Too much credit in a short period of time: If you apply for too many credit cards or loans close to each other, it sets the alarm bell ringing for any bank. As for your CIBIL score, it inches lower each time you apply for a new loan. Every time you apply for a new credit card or loan, there is a “hard enquiry” made on your CIBIL score and CIBIL report, bringing down the score a few notches lower each time.
Always close your loan account: After you pay back all the dues on your loan, make sure the loan account is closed. Always collect the loan closure letter from the bank loan officer. Sometimes even after paying back the loan, bank records would not be updated and this results in a poor CIBIL score.
Get a mixed bag of credit: There are two types of loans, secured and unsecured. If you take too many unsecured loans, banks tend to see it as a negative and might be inclined towards declining your loans. What you can do to is to take both unsecured loans like personal loans and secured loans likes car or home loans. Credit cards also count as unsecured credit.
By Aditya Kumar
The author is Founder & CEO, Qbera.com