When considering whether to lend money to a person in India, lenders pay close attention to the credit score. One must therefore be aware of their CIBIL score and how to raise it. A lender grants a loan to a borrower in whom the lender has complete faith. The credit score method aims to assess a person’s likelihood of making timely debt payments. Lenders should look at a borrower’s own residence, historical earnings, and prudent utilization of prior borrowings. The Indian credit score system is intended to give financial profiles of people seeking loans from various types of financial organizations.
In India, CIBIL is a key agency that provides credit scores and credit reports of an individual to all financial institutions. CIBIL receives information about loans and credit cards with the help of its associate partners which include lenders and members of credit institutions. The information is generated by preparing a credit report which is a document prepared by a credit bureau that essentially captures in depth all the information related to an individual’s credit history. The CIBIL score is a three-digit numerical indication of personal creditworthiness. It is usually between 300 and 900.
CIBIL score plays an important role from an individual point of view and a lender’s point of view. A credit score helps to monitor an individual repayment track record, whether it is the possibility of defaulting on payments or delaying them. Having a good credit score, all individuals and financial organizations take advantage of various benefits provided by lenders such as:
Quick approval of loans without any lengthy process:
A good CIBIL score helps an individual in a quick approval of loans by avoiding lengthy procedures as lenders can be confident that one can repay the existing loan in future without any delay or default.
The low-interest rate on loans:
Generally, people with high CIBIL scores get loans at lower interest rates as compared to borrowers with low CIBIL scores.
No Credit Risk Involved:
A borrower with a high CIBIL score indicates low credit risk and is not likely to default or delay any payments. With this, lenders can increase the credit limit of an individual. For an individual having good CIBIL scores, the lender can offer various credit card benefits such as wide acceptance and recognition, lounge access, and cashback and bonus points as well.
It has been observed that some borrowers apply for a loan or credit card, and they use it and subsequently make regular payments for the first six months. Then after optimum utilization, they apply for loans of large amounts to take undue advantage of the loan. A dishonest borrower can put the lender in trouble under such circumstances.
An individual’s CIBIL score varies according to their repayment behaviour and the lender’s efficiency in passing that information on to the credit bureaus. Due to the importance of data in recent times, it has become very important to have an up-to-date and accurate credit score. But if there is a default in a person’s credit report due to the following reasons:
Repossession:
When a creditor retrieves the collateral for a loan, a recap appears on the credit report that specifies that a person was unable to repay the loan as agreed.
Settled accounts:
Sometimes a creditor may agree to accept an amount less than the total amount owed to an individual, so it is known that the debt has been settled. But, if a person was not able to repay the loan as originally agreed, the settled accounts would still be considered negative on the credit report.
In case of defaults in their credit report, a person should try to enhance or improve their credit score as without a good credit score lenders may not have the confidence to lend further.
How to increase the CIBIL score after default:
Regular Repayment Practices:
Making payments on time is very important as this financially responsible behaviour can have a positive impact on the lender with more impact on the CIBIL score.
Payment of outstanding credit balance:
Credit management is very essential for an individual to adopt. The individual should pay all his dues on time as outstanding dues and increased balance on the credit card can lower the CIBIL score.
Maintaining Credit Utilization Ratio:
It is very important to maintain the credit utilization ratio between 30 and 40%. Because the credit utilization rate goes up it shows that a person is spending most of his income on debt payments which can lower the credit score.
Keep an eye on the credit report:
A person should ensure that there are no discrepancies in the credit report. One should check his credit report after every six months to rectify the errors so that there is no confusion in the mind of the lender as there are some errors that negatively impact the CIBIL score. For example, if the wrong credit report is sent to the credit bureaus it can lower the credit score.
The balance between credits:
The type of loan secured or unsecured that an individual has a significant impact on his CIBIL score. One should try to maintain a balanced combination of both secured and unsecured loans as a higher proportion of secured or unsecured loans can lower the CIBIL score.
Never Indicate Risk
The credit scoring model is designed to pick up early signs of stress and risk in the borrower’s profile. For example, non-payment of credit cards, and payments below the total amount due or revolving credit are the first signs of stress in a borrower’s credit profile. Other changes, such as taking a cash advance or using a card to meet business expenses, are signs of a cash flow strain.
Opening a new credit line increases your credit limit, but each application for a new credit line places a hard inquiry on your credit report. Hard Inquiry is a detailed analysis of your credit profile to assess how much risk you have as a borrower.
Since hard inquiries show up on your credit report for two years, multiple hard inquiries in a short period can negatively affect your credit score. Rejection of loan applicationsbecause of multiple enquiries is an extremely negative event.
Be patient
A credit score does not improve overnight, and it requires constant effort to improve.
Therefore, you need to be patient and monitor your credit report, your various credit lines, and spending patterns and ensure timely repayment of the loan. Over time, this will help increase your credit score in India and improve your creditworthiness.
Conclusion
Increasing your CIBIL score after getting a default is a difficult task but with the help of planning and discipline, it can be achieved. The CIBIL score helps lenders identify a “problem account” before disbursement. One should always keep in mind that financial and credit-related information contributes to the credit score. Hence, one should strive for a good credit report.
