Lenders have very strict eligibility criteria for loans. These eligibility criteria help lenders decide which borrowers can repay their loan on time and would make a reliable customer. Lenders’ eligibility criteria consider several factors, such as the borrower’s age, income, debt-to-income ratio, etc. The CIBIL score is one of the key factors that affects a person’s home loan eligibility. What is CIBIL Score?
Credit information agencies across the world collect data on how customers use credit. They collect data regarding the borrower’s past repayment history, the credit mix they hold, the number of credit enquiries they have made, the number of years for which they have been using credit, etc. This information helps credit agencies decide a person’s creditworthiness and repayment capacity. The Reserve Bank of India recognizes four credit rating agencies: Experian, Equifax, CRIF Highmark and TransUnion CIBIL. Most lenders in India choose TransUnion CIBIL as their credit information partner. The credit score assigned by TransUnion CIBIL to credit users is known as CIBIL Score. Borrowers who are highly creditworthy are assigned a high CIBIL score and borrowers with low creditworthiness and repayment capacity are assigned a low CIBIL score.
The best CIBIL score for loan is 750 or above. Such a credit score indicates high creditworthiness and repayment capacity. Borrowers who have such a CIBIL score for housing loan get approved quickly and lenders also offer such borrowers lucrative loan terms and conditions, such as low housing loan interest rates, flexible repayment tenor, etc., to entice them and turn them into customers. Borrowers whose CIBIL score varies between 650 and 750 get approved for a loan but are not offered the best loan terms and conditions and borrowers whose CIBIL score is below 650 find it very difficult to get approved for a housing loan or a loan of any kind. Such borrowers are often asked to buy insurance or add a co-borrower to mitigate the risk involved for the lender in lending money to the borrower.
If you do not have the best CIBIL score for loan or the ideal CIBIL score for housing loan, do not worry. It is possible for a person to improve their CIBIL score. This article focuses on tips on how to achieve optimal CIBIL score loan approval.
Simple Tips on How to Achieve Best CIBIL Score for Loan
1. Maintain a Clean Repayment History
Under the credit rating system that TransUnion CIBIL follows, a borrower’s repayment history makes up almost 40% of a borrower’s credit rating. Needless to say, a clean repayment history with no missed EMI and credit card bill payments leads to a good CIBIL score.
If you wish to improve your CIBIL score, develop a habit of paying loan EMIs and credit card bills on time. Set up auto-payments if you tend to forget due dates. Do also keep in mind that paying two or three EMIs on time will not help you improve your CIBIL score. If you want the ideal CIBIL score for home loan, pay your EMIs and credit card bills for at least 6 to 8 months and then expect to see any concrete changes.
2. Maintain a Healthy Credit Mix
Loans are of two types: secured and unsecured. Secured loans involve collateral and therefore, are seen as low-risk loans by lenders. Secured loans do not involve any collateral and are sanctioned entirely based on merit and borrower’s credit profile. Credit information agencies give a higher rating to borrowers who have a healthy mix of both secured and unsecured loans as such a credit mix denotes a borrower’s ability to handle all types of credit.
3. Never Close Old Loan Accounts
If you want to have a good CIBIL score, do not close old loan accounts since the older your credit history, the better will be your CIBIL score.
4. Make Sure Your Credit Report Has No Errors in It
Lenders and credit rating agencies maintain records of millions of credit users around the world. Thus, sometimes, credit profiles get mixed. Other times, lenders share wrong information about a borrower, which leads to their credit score going down. If you do not have the best CIBIL score for loan, the first thing you must do is check your credit report for errors. How to check CIBIL score and CIBIL report? A borrower can request TransUnion CIBIL to share their CIBIL report with them. TransUnion CIBIL will charge a small fee to process this request but this is the most accurate way of finding if there are any errors in a person’s CIBIL report that is causing their CIBIL score to go down.
5. Credit Utilization Ratio
The Credit utilization ratio gives the percentage of a borrower’ credit card limit that is under use. The credit utilization ratio makes up almost 30% of a borrower’s CIBIL score. A high credit utilization ratio indicates high dependency on credit and therefore, borrowers who have a credit score have a low CIBIL score and vice versa. If you want the ideal CIBIL score for home loan, maintain a low credit utilization ratio. Never exhaust the limit on your credit card and try and clear the entire amount due and not just the minimum amount due each month.
Final Words
Loans, especially home loans are a long-term commitment and therefore, a borrower must try their best to avail of the lowest interest rate possible on their loan. A low interest rate reduces the total interest outgo and helps one keep their EMIs affordable. However, a borrower is offered a low interest rate only when they have the ideal CIBIL score for home loan. If you are planning to apply for a home loan in near future, check your CIBIL score and move ahead with the application procedure only if your CIBIL score is at least 750 or above. If you do not have the required CIBIL score for housing loan, use the tips mentioned in this article to improve your credit score first and then apply for a loan.