InvestorQ : How to improve your CIBIL score and increase your chances of ensuring that your loans get approved?
Arti Chavan made post

How to improve your CIBIL score and increase your chances of ensuring that your loans get approved?

2 years ago

We tend to believe that not borrowing is a good thing but that is not necessarily good for your credit score. You need to have some credit outstanding to judge your credit worthiness but the focus must be on how well you manage the credit. Here are a few pointers.

The focus is not on zero debt but on skilful management of debt

This is the first and foremost thing that every individual needs to remember. There is misconception that if you do not apply for any loans then you will have a high credit score. The truth is that if you do not have a credit servicing history then how somebody decides the nature of your credit history. Having no debt is not an advantage when it comes to you credit score. Rather you must have reasonable debt that is serviced on a regular basis. How you manage your debt by keeping outstanding amounts in control and repay on time actually determines your credit worthiness. The rule is to borrow but to manage your borrowings skilfully.

Don’t keep on applying for loans / credit cards

If you keep applying aggressively for loans and credit cards, it will be viewed as a sign of financial desperation. An agency like CIBIL will not view that too favourably. This is truer when your loan application or credit card application gets rejected. In such a case, do not keep on applying for the same loan or credit card with other banks. Remember, all your application data gets downloaded to CIBIL and has a negative impact on your credit score. To the extent possible, keep your frequency of applications low. Once an application is rejected, give a time lag before you apply again for another loan or card.

Keep your borrowing to a minimum

One of the benchmarks that CIBIL uses to see how much is spent by you each month servicing your debt. If your EMI on loans and credit card dues is adding up to a good bit each month, then it is likely to negatively impact your credit score. One of the basic things that CIBIL wants to ensure is that you do not start binging on debt just because it is easily available. Also, a high level of borrowing will get you into liquidity pressure down the line. When you have a credit limit of Rs.5 lakhs on your card, try to keep your usage at 30-40% of the limit available. Don’t get too close to 100%.

Pay your EMIs on time

This is most important factor that CIBIIL considers when evaluating your credit score. Ensure that your EMIs on all loans are serviced on time. EMIs outstanding for over a period of 1 month can be a major negative mark on your credit score. Typically, EMIs are paid either through post dated cheques (PDCs) or through an online ECS. Either ways, ensure that these EMIs do not bounce. Every instance of cheque bounce has a negative implication for your CIBIL score.

Be careful when you settle loans mutually with your bank

In case of unsecured loans like personal loans and credit cards, banks do offer the facility of closing the loan at a discount. This is referred to as a settlement. For example, if you have Rs.10 lakhs outstanding on your personal loan and are in financial trouble, you can request your bank to settle the outstanding at around Rs.8 lakh. Most banks will agree as it does not show up as NPA. However, this impacts your CIBIL score negatively. In the CIBIL records this particular loan or credit card will show up as “Settled”. That becomes a negative mark when you go for your next borrowing. That is exactly the problem that Janak faced, wherein despite his good financial position, his loan application got rejected because of a previous loan settlement.

Watch out for joint applications and guarantees given

There are many occasions when your friend or relative may not be eligible for a larger loan for the purchase of a house or a property. It is quite normal to insert your name as a co-applicant to help them get a higher loan. But this can negatively impact your CIBIL score. More so, if your friend or relative defaults on the EMI, it becomes a negative mark on your credit history too! There is also the issue of loan guarantees provided. Many PSU banks still insist on a guarantor for personal loans. In such cases, if you stand guarantee, then your credit score gets negatively affected. In case of an investor, he had stood guarantor for about 4 such loans for his friends and relatives, 2 of whom had actually defaulted.