In order to avoid situations where a loan turns into a non-performing asset, bankers pay attention to the CIBIL scores before sanctioning any loans. Your CIBIL score or credit score is an important factor in determining whether your loan application will be approved. These scores are computed based on various parameters such as your credit history, payment patterns, defaults, etc. Let us see how one can maintain a good score.
What is the ideal score
TransUnion CIBIL Ltd (formerly known as Credit Information Bureau (India) Ltd) collects and maintains records of an individual’s payments pertaining to loans, credit cards and also provides the credit scores on payment of a nominal fee. Any score above 750 is a good score. A good score indicates strong creditworthiness while a low score exhibits low creditworthiness. Low scores will brand you a risky borrower and bankers will be hesitant to approve your loan.
Never default on loan repayment
Failure to pay the EMIs on a loan promptly attracts penalty. Let us assume that Mr A’s housing loan is due on the 14th of every month and if his account does not have sufficient balance on that date, then a penalty will be levied. Further, Mr A has an adequate balance in his account only on the 20th of the month and asks the banker to debit his account. Thus he pays his EMI six days late. But Cibil will record it as the borrower’s incapability of servicing the loan.
Credit card usage
Let us assume that you have got a credit card that you are not using. On Cibil records, it is treated as if the card holder has no repayment capacity and therefore is not using the credit card. Again, if a person frequently withdraws cash using credit cards then Cibil sees it as spending beyond one’s earnings and reduces the credit score. So, one should use credit cards wisely.
Converting outstanding amounting into EMI
Suppose you make purchases with a credit card but are unable to make the payments within the due date. You convert the same into a loan and repay it in monthly EMIs. Your credit scores then reduces as Cibil views the same as lack of repayment capacity. Avoid this mistake to boost your credit score.
Opting for one time settlement
If a person opts for one time settlement wherein the principal amount outstanding on a credit card or personal loan alone is repaid and the interest is waived off by the bank,even then credit scores will drop significantly.
Too many enquiries
Take the instance of someone enquiring with five banks for a loan by filling up the form and providing PAN card or credit card details but not availing any loan finally. Cibil treats him as a person with potential risk as he has enquired in different banks by filling the forms with his credentials.
Financial discipline in usage of credit card and repayment of loans alone will enhance your credit score.
The writer is associate professor of finance & accounting, IIM Shillong