Why CIBIL Score is important for a Loan?

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Personal Loan for Low CIBIL Score

CIBIL score is basically a three-digit numeric score indicating an individual’s creditworthiness. The Credit Information Bureau India Limited generates individual CIBIL scores based on loan repayment history, outstanding debts, variety of credit availed, etc. Hence, timely repayments of loans will fetch you a greater score and failure to repay in time will result in a lower score.

This score prepared by the CIBIL is used by lenders. Banks or non-banking financial entities approve applications with higher CIBIL as it promises timely repayment of the loan. For a better understanding, below is a table of the CIBIL score range and what it means when you are availing of a loan.

Personal Loan for Bad CIBIL

  • CIBIL or credit score is an important factor in the personal loan because there is no security or collateral involved in it.
  • Both banks and NBFCs grant a personal loan on low CIBIL scores as well.
  • However, the lower the score higher will be the rate of interest.
  • An additional income source, hike in salary, or bonus can contribute to increasing your chances of getting a loan in case of low CIBIL.
  • Applying for a lower amount can also do the trick to get your loan application accepted.
  • No matter whether your personal loan application gets accepted or rejected, you must work towards improving your CIBIL score.

What to do if you have CIBIL Score has reduced?

Has your credit score reduced? Don’t panic or stress. It can be fixed, without any cost. You will have to follow a disciplined approach to continuous improvements and monitoring. Here are 5 proven ways of preventing your score from reducing further and improving it over time.

1. Don’t take any more loans

Your net worth is the assets you have (cash, investments, property, etc) MINUS your liabilities (loans, credit card bills, etc). Reducing credit score is typically accompanied by a reduction in net worth. Don’t reduce it further by taking more loans. Keep a target credit score – apply for an additional loan only if you hit that target (say 720). Applying for a loan also reduces credit score because banks / financial institutions will make a query for your credit report with a credit bureau (e.g. CIBIL) which reduces your score. Loans also have interest and processing fee charges which can sometimes be quite high.

2. Reduce credit card expenses

Credit card utilisation (i.e. % of your credit card limit that you have used up) is an important part of your credit score. As your utilisation % increases, your credit score reduces. This is because financial institutions see you have credit hungry and start avoiding giving more loans or credit cards to you. Move your credit card expenses to a debit card till your score improves. This will reduce your utilisation % and will increase your credit score.

3. Repay overdue EMIs

Delays on loan EMI is the biggest reason for credit score to reduce. For every EMI or credit card payment that you miss, the bank / financial institution reports this to 4 credit bureaus (CIBIL, Experian, Equifax & CRIF) which shows in red or orange colour on your credit report. Repay your late EMIs or credit card bills at the earliest. This would mean cutting some other avoidable costs and requires discipline. Remember, your credit history cannot be changed – it will be with you for your entire life. Don’t paint it red colours.

4. Improve budgeting

Lot of times the credit score reduces because of financial stress. It could be because of medical reasons, loss of job, and expensive life events like marriage or unexpected emergencies. You should find ways to reduce costs (by avoiding unnecessary expenses) and increasing income (e.g. via husband/wife, working additional shifts, etc). This sounds easy but is hard to implement. It will not show results overnight. You will need to have the discipline for some time (at least 6 months). Once you meet your target credit score, you can relax for some time and resume some expenditure that you stopped. But remember to continuously monitor your credit report.

5. Continuous monitoring

There is a famous saying – if you can’t measure something, you can’t improve it. Similarly, if you can’t monitor something, you can’t tell if your efforts of improvement are working. You should check your credit report at least once a quarter. You should check the following:

  • If all information is correct. Sometimes financial institutions report wrong data. If that is the case, you should immediately point it out to them and ask them to correct it within 30 days.
  • If a score has reduced, the reason for the reduction in score.

What factors make your CIBIL or Credit Score lower?

Getting a personal loan with a low CIBIL score is not impossible. However, it is important to have a look at the factors causing a lower CIBIL or Credit Score.

  1. Multiple unsecured loans: Taking too many unsecured loans can cause a decrease in your CIBIL score.
  2. High utilization of credit limits: Every credit card comes with a credit limit which is decided based on your income level, and credit history. If your outstanding balance is over 30% of the credit limit, then it is considered as high credit utilization which negatively affects your credit score. However, a ratio well below 30% would reflect that you are managing your debts appropriately which will contribute positively to your CIBIL score.
  3. Untimely payment: Any default in your payment history will take your CIBIL score down. The default includes not repaying your debts or EMIs on time or in full.
  4. Multiple rejected loan applications: Getting rejected by multiple banks is not seen as a good sign for a loan borrower. Each time you apply for a loan, your respective bank asks for your credit information, and each time your credit information is requested, your CIBIL score goes down. Besides multiple loan application and rejection gives the impression that you are credit hungry, thus, not a right prospect of advancing loan.
  5. Settlement of Debts: Making a settlement with the bank and closing outstanding credit by paying fewer amounts than the actual dues can seem to be a convenient option. However, it will have a negative impact on your credit score.
  6. Un-diverse credit mix: A single type of credit or account does not add much to your credit score. Having credit cards, loans and managing them skillfully over time will increase your score.
  7. Credit inquiries: Each time any inquiry on your credit information is made, your CIBIL score goes down.

How to improve your CIBIL Score?

If you happen to have a CIBIL score that is not good, then there is no reason to lose heart. There are things you can do to improve that score. Here are some tips that can help you improve your credit rating.

  • If you have credit cards with outstanding balances then you need to pay them back at the earliest possible because even if you pay the minimum due, it only gets the bank off your back, the remaining is still considered outstanding by CIBIL.
  • If your credit score is not good, try to keep the borrowing down to a minimum. Doing this will give you time to recover from your current debt without creating new debt.
  • Let’s assume that you have cleared all your debt and decide that to celebrate your freedom from the debt you will cancel all your credit cards, DON’T! If you cancel all your cards, then you won’t be able to create a credit history when you need one at a later stage.
  • If you don’t have cards or loans that can help you create a credit history to get your score going, you can always go in for a secured loan like a vehicle loan. Sure you may not get the best interest rate on such a loan but at least you may get a loan that can help you jump start your credit history.
  • There are times when you move into a house and realise that because of the misdeeds of the person who stayed there before you, the address has been blacklisted. What you can do in this case is to inform CIBIL of the mistake and get it corrected.
  • As far as using your credit cards are concerned, make sure you don’t come close to the limits of your cards too often. If you do, then your score might deteriorate further.
  • In case you can’t get a loan or a credit card to get the history going what you can do is to approach banks that provide credit cards against fixed deposits (FDs). The idea is that you open an FD with them and they will issue you a credit card that has a limit slightly lesser than your FD amount. This will get you into the credit system and get your credit history going.
  • In time, even utility bill payments are going to affect your CIBIL score so it’s best to make a habit of making sure that ALL your bills are paid in full and on time.
  • If you are rejected for a loan or credit card once, don’t keep applying for one at other banks. Take some time out to fix your score and then apply again.

Ways get money through personal loans despite a low CIBIL score

Improve your income stream

In order to get incremental personal loans, the lender has to be satisfied that you have the ability to repay the loan. A new source of funds or a salary increment will go a long way in convincing the lender that there is enough cash flow to support new loan repayment. One will have to convince the lender that the new income stream is a regular one and not a one-time income. Any documentary proof like a contract with the vendor from where the borrower is getting money will help in building up the case.

Even if the lender may see merit in the story they may agree to lend on a higher interest rate than the market rate along with some additional charges.

Go in for a smaller loan

Asking for a bigger loan after having a low CIBIL score will scare away any lender. A smaller loan with an adequate income stream may convince him to risk a small amount. Taking a small loan and repaying it regularly will not only convince the lender but also help improve your CIBIL score.

Collateral loans

While personal loans may be difficult, but not impossible despite a low CIBIL score, one can go in for a Collateral Loan.

Loan against shares, gold loans, – Term deposits are easier to get despite a lower CIBIL score. The lender is comfortable that they have collateral as a guarantee against any defaults. In such cases, the CIBIL score does not matter. On the other hand, a regular payment on these loans can help in improving your CIBIL score.

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