A CIBIL score is a numerical value ranging between 300 and 900 which is arrived on the basis of your transactions with financial institutions.
In case the EMIs stop getting paid, the bank will reduce your CIBIL score, and chances of a loan getting sanctioned to you, in the future, would be difficult.
My nephew, who wanted to take a home loan and whom I had advised to obtain his CIBIL report, called me to express his shock when he found 0 credit score in his CIBIL report. He was worried that with 0 score, which he perceived to be negative rating, he would not be able to get a home loan.
The article is the result of the discussion which I had with him.
CIBIL is the pioneer credit information bureau and thus the word “CIBIL” has become synonym with credit history and credit bureau. A credit information bureau maintains the history of credit transactions of the borrowers based on data supplied to them by financial institutions. A CIBIL score is a numerical value ranging between 300 and 900 which is arrived on the basis of your transactions with financial institutions. The higher the number, the higher is your probability to get a loan or credit and that too at better terms. However, in case you have never availed any credit card or loan in the past, your credit score would be 0. It may also be -1 in case your credit history available with the credit bureau is for less than 6 months. For new borrowers, the CIBIL assigns score between 1 and 5. The lower the score, the higher the risk of lending you from the lender’s perspective.
Why CIBIL score is important
Before extending any credit facility, the lender wants to satisfy itself that the borrower will repay the money in due course. As the saying goes, history repeats itself and which equally applies to individual behaviour also. With the advent of credit information bureau which keep history of the borrowers, based on their credit behaviour in the past, the lenders are in a better position to assess the likelihood of the borrower defaulting in servicing of the loan. The credit score is produced by software with the help of various parameters of the borrowers. Lenders are comfortable with lending to a person who has a credit score of more than 750.
Can a person with no credit history get a home loan?
This is a chicken and egg problem. How can one create a credit history unless he gets to use some credit from the system and how can the system lend to a person who does not have any history to provide the lender, a satisfaction of the intention of the borrower to repay the loan? Though the credit score is the starting point for lenders to consider the borrower, primarily, for lending, but this is not the only criteria applied by the lender to grant loans. So in case you do not have any credit history, you can still get a home loan from lenders but you may have to provide more documents to the lender for it to arrive at the satisfaction needed about your ability and intention to service the EMIs regularly.
How the lenders determine the ability and intention of the borrower
Credit information bureaus have come into existence only after 2005 but banks have been lending for ages. So, in case the borrower does not have any credit history, a person can still get a loan and in such a situation the lenders use the old yardsticks to determine the eligibility of a borrower to get a home loan.
Your educational qualifications and job profile are the most important criteria used by the lenders in such situations. For example, if you are a qualified doctor or a chartered account, which ensures you regular income, the lender may get comfort associated with such qualifications. Likewise one who is employed in a higher position in government like, say, afresh IAS or IPS, he in all likelihood will get the home loan even if he does not have past history.
Even if you are not so lucky to be working with the government or have high educational qualifications, you still have chances of getting a home loan. In such cases the lenders will ask you for your bank statements of the past few years to decipher your attitude towards money. If there are regular debit for investments like systematic investment plans etc., this may give comfort to the lender about your saving habits. The banks may scrutinise your banking transactions in details also to understand regularity with which you pay your utility bills like electrify or mobile bills. They may also verify the regularity of payment of your rents in case you are staying in rented places. Your spending and saving habits are also ascertained from your bank statements so that the behaviour can be extrapolated for servicing of the home loan as well. The lenders may also ask the borrower to furnish guarantee from a person who has credit history with a good credit score. These are some proxy parameters used in the absence of regular credit reports.
The parameters discussed above are not exhaustive and each bank may have different internal parameters in order to lend a person who does not have any credit history. Since you do not have any credit history, you may not be able to get the best rates for home loans which are otherwise available to persons with an excellent credit score.
(The writer is a tax and investment expert and is working as Chief Editor of ApnaPaisa. He can be reached at email@example.com)