Have a high CIBIL score? Know the importance of it for a personal loan

A personal loan is one of the most popular borrowing options for individuals seeking quick access to funds for a variety of personal reasons. However, the unsecured (collateral-free) nature of this loan makes it vitally important for lenders to ensure the credit worthiness of the applicant. In this regard, one of the first things that prospective lenders look at is the credit score of the loan applicant. With TransUnion CIBIL being arguably the most popular provider of credit score in India, the importance of a good CIBIL score (750 and higher) for securing a personal loan cannot be overstressed.

What is CIBIL score?
The credit score provided by TransUnion CIBIL as part of an individual’s CIBIL report is commonly referred to as the CIBIL score. It is a 3-digit number between 300 and 900 that is calculated based on your credit history. A score closer to 900 such as 750 or above is generally considered to be a good score and by the same logic, a score closer to 300 is considered to be a poor CIBIL score.

A good CIBIL score indicates higher credit worthiness through responsible past credit behaviour and good repayment track record. Thus, it indicates reduced default risk for the lender. Though credit score is not the only criteria determining a person’s ability to secure a personal loan, it is one of the first things that lenders look into when evaluating loan applications. Having no credit history or a poor credit score makes the lender dubious about a person’s repayment capacity as they either cannot gauge the risk or consider the applicant to be a higher risk borrower.

Factors affecting CIBIL score

While the exact formula to calculate CIBIL score based on an individual’s credit history is protected proprietary information, the following are some of the key factors that are known to impact your score:

• Repayment history: This is perhaps the single most important thing to keep in mind – always pay your loan EMIs and credit card dues on time. While this might seem simple enough, not following this simple rule is a common and easily avoidable mistake. While missing your payment due date once or twice over a decade might not impact your CIBIL score significantly, regularly doing so will. But that’s not all. What can really have an adverse long term impact on your CIBIL score is settling or defaulting on a loan / credit card dues. Such actions adversely impact your score for the long term (up to 7 years).

• Credit Utilisation Ratio: This is a simple ratio of your current outstanding debt to your assigned credit limit across all active credit cards and loans. Ideally you should maintain this at less than 30% i.e. limit use of credit to 30% or lower of the assigned limit across all forms of credit. Lower credit utilisation indicates fiscally responsible behaviour that positively impacts your credit score.

• Credit Mix: In India, credit can be of two types – secured credit such as home loans, car loans, secured credit cards, etc. and unsecured credit such as personal loans and credit cards. Having too much unsecured credit might make it seem that you are at higher risk of future default. Maintaining a balanced mix of secured and unsecured credit can help you maintain a high CIBIL score.

• Age of Credit History: The older your history of credit card or a loan usage is, the better your CIBIL score will be provided you have managed them well. A longer history of prudently using credit indicates that chances of your being fiscally prudent in the future are higher. This gets reflected in your CIBIL score too, however, the impact of age of credit history is probably lower than your repayment history.

How does high CIBIL score affect your personal loan eligibility?

As mentioned earlier, personal loans are collateral-free in nature which from a lender’s perspective means that in case of a default, the lender cannot seize any assets to recoup the cost of lending. This is what makes lenders set stringent personal loan eligibility guidelines with respect to CIBIL score, age, income, repayment capacity, etc. for applicants. Key reasons why a high score affects your personal loan eligibility lies in how a high CIBIL score is perceived by lenders. The following are some ways in which lenders perceive the high CIBIL score of prospective personal loan applicants:

• Fiscally responsible
• Good repayment track record
• Clean credit history
• Low/manageable levels of current debt

From a lender’s viewpoint, all of the above indicate lower risk of default in case they lend to you. That’s how a high CIBIL score increases your chances of being approved for a personal loan. What’s more, you might even be eligible for additional benefits in case of some lenders. Apart from the eligibility itself, some key benefits you might avail by maintaining a high credit score include:

• Lower interest rate
• Higher loan amount
• Shorter loan application processing times/quicker approval
• Longer tenure

Do's & Don't to maintain good CIBIL score

Now that you have some insight into the importance of a high CIBIL score with respect to eligibility for a personal loan, the obvious question of course is – What do I do to ensure that I maintain a high credit score? The following is a cheat sheet of best practices to improve/maintain a high CIBIL score and improve your chances of securing new loans and/or credit cards in the future:


If the above list seems simple to you, it is in fact easy enough to even improve/maintain a high credit score. The real difficulty lies in the fact that you have to keep on doing these seemingly simple things over a long term.

Conclusion

While in the above sections, we have discussed the vital role a high CIBIL score plays in your eligibility for a personal loan, you should always remember that it is not the only consideration. Lenders also place significant importance on your income, age, employment history, number of dependents, etc. as these can impact your repayment capacity and by extension your risk of default. So, do ensure that you meet all the eligibility criteria set by your prospective lender before you actually submit your personal loan application.