If you want to get a loan, it is important to know why your CIBIL score matters. Whether it be something like a home loan, personal loan, or even a loan for small businesses, your CIBIL score decides whether or not you can borrow from a lender and what interest rate you will get charged.
In this article, we will discuss all that goes into making the good CIBIL score criteria, how it affects the loan application process, and practical tips one can take to improve it if it isn’t too high. Let us go!
Why CIBIL Score is Important?
It is a three-digit number against a CIBIL score which runs from 300 to 900, based on creditworthiness. This means to say, it’s financially like a report card, that’s needed as proof by banks and lenders to assess your ability in paying back loans. Now here’s where it matters:
- Loan approval: Banks first check your CIBIL score before giving you any loan. This score will prove to be a major factor in determining the chances of your approval.
- Interest Rates: With a good CIBIL score, one can get loans at relatively lower interest rates and hence save a lot of money in the years to come.
- Financial Health: A snapshot picture of the full financial discipline exhibited, including your payment history and current debt utilization.
What Is a Good CIBIL Score for Low-Interest Loans?
750 or more is considered an excellent CIBIL score by most banks and financial institutions. The following is a breakdown of score categories:
- 800-900: Exceptional will most likely be offered top rates at which the bank lends for such loans.
- 750-799: Very Good-high chances of loan approval at competitive rates.
- 700-749: Good-likely an approval, but the amount charged will not be the lowest.
- 650-699: Fair-the loan may still be granted, but the terms may be very unfavourable.
- 300-649: Poor-either you will be rejected, or you will be charged a higher rate.
A score of 700 or above certainly puts you miles ahead in negotiation for a low-interest loan. With a score below 650, it will be harder to take out a loan or you would probably have to pay much higher rates.
What Is the Effect of CIBIL Score on Loan Affordability?
This is not just about improving your chances of getting a loan but making it affordable on the part of the borrower. Here is how it happens:
- Lower Interest Rates: Banks give almost 0.15% to 0.25% discounts over the present basic rates as interest against loans to borrowers of excellent credit scores.
- A Bigger Loan Amount: With a good score, a person is eligible to avail higher sums.
- Faster Processing: Applications are processed faster for borrowers with high CIBIL score.
However, low CIBIL scores can result in the rejection of the loan, increased interest rates, and a lower amount of the loan.
Reasons for Drop in CIBIL Score
There are very many reasons by which your credit score can be affected. Here are some common mistakes which can make your score poor:
- Missed Payment: This can be a major hurdle for you if not taken seriously when you miss paying EMI or credit card bills.
- High Credit Utilization: This should not go more than 30% of the credit limit. This score will be ruined.
- Loan Default: At times loans are not paid promptly.
- Loan Settlements: Settling loans will bring your score down.
- Becoming Guarantor: If the primary borrower defaults, the dependant’s score could also be negatively impacted.
Improving a Low CIBIL Score
So, your CIBIL score is not in the place you’d like? No worries; proven strategic measures to boost credit score development are as follows:
- Monitor Payment of EMIs and Bills: Being on time with payments is by far the most effective way of improving any score.
- Maintain a Lower Utilization Ratio: Do not use any credit card beyond 30% of the limit.
- Avoid Too Many Loans: Many hard inquiries lower your score.
- Avoid Closing Old Credit Cards: Older accounts with healthy payment histories enhance your score.
- Check Your Credit Report: This should be done regularly to see if errors can be identified and disputed.
How to Get the Cheapest Loan for Good CIBIL Score
If you want to get a loan at the cheapest interest rate, here are some useful tips:
- Maintain a High CIBIL Score: A CIBIL score above 750 will give you excellent rates.
- Go for a Joint Loan: A co-applicant with a good credit history can increase your chances of getting approved and securing lower interest rates.
- Keep Your Loan-to-Value Ratio Low: Making a higher down payment reduces the risk to the bank, thus making you eligible for better terms.
- Increased FOIR Will (Fixed Obligation to Income Ratio): Make sure your monthly obligations like EMIs are not more than 40-50% of your income.