What is CIBIL Score?
Credit Information Bureau (India) Limited (CIBIL), now known as TransUnion CIBIL Limited gathers information regarding an applicant’s present and past financial history and his/her pattern of repayment and accordingly, allots a score to the person. This score ranges from 300 to 900. A higher CIBIL score signifies decent finance management and a clean credit record. It also implies that the applicant is highly creditworthy and there is higher probability of him/her repaying a home loan or personal loan or any other type of loan within expected time.
According to CIBIL’s analysis, about 79% of loans are sanctioned to people having a CIBIL score of 750 and above. Apart from easing the process of obtaining loan for the applicant, a higher CIBIL score also levies a relatively lower rate of interest.
How is the Rate of Interest on Home Loan Decided?
The rate of interest on home loans depends primarily on the CIBIL score of the applicant. Along with factors like the existing relationship of the applicant with the bank, special offers for the type of the citizen, the income pattern of the applicant, etc., CIBIL score is the deciding factor that helps a financial institution in determining the interest rate that it would offer to the applicant.
With a credit score of 750 and above you will get home loans sanctioned at lower rate of interest and having a CIBIL score of 850 and above you will be offered the lowest rate of interest. However, with a credit score of 550 or above you are expected to be offered loans at the highest rate of interest. Having a CIBIL score below 550 can make it difficult for you to getting your home loan application approved.
Relation between CIBIL Score and the Rate of Interest
A home loan is an amalgamation of two main units – the principal and the interest amount. The payable principal amount is equal for all applicants regardless what their CIBIL scores are. However, the difference in latter is due to the difference of interest rates offered by the lenders based on their CIBIL scores.
A high CIBIL score stands for your high creditworthiness, and it’s on the safer side for the bank to lend you a loan. Having a low CIBIL score signifies low creditworthiness increasing risk factor for the lender to grant a loan to you.
How can CIBIL Score Help?
Generally, a higher CIBIL score fetches you a lower rate of interest on your loan. If the lender offers a higher rate of interest, you can check your CIBIL score and detailed report and find out the reason for the same. However, there’s always a scope to cut down on the interest rate by improving your CIBIL score.
Factors that Affect CIBIL Score:
Your CIBIL score determines your creditworthiness and repayment capacity. Before approving your loan application, lenders make a note of your credit score. Therefore, it is essential that you and check CIBIL score before applying for any kind of loan. Let us have a quick look at some of the important factors that impact your credit score.
A good repayment history will indicate that you are financially disciplined. Therefore, if you have made prompt repayment of your loans in the past, you will have a high credit score. Paying timely credit card bills and keeping up with monthly EMI payments will also help you boost your credit score. On the other hand, outstanding debts and defaulting on a loan can hamper your CIBIL score significantly.
Multiple loan applications
When you apply for a loan, the financial institution runs an inquiry to evaluate your credit report. Multiple inquiries can hurt your credit score. Therefore, in order to avoid this, you must avoid making multiple loan applications and apply for a loan only after checking the eligibility criteria set by the lender.
Number of unsecured loans
If you have availed various unsecured loans in the past, your credit score will be affected negatively. Therefore, it is advisable to maintain a healthy credit mix by availing both secured and unsecured loans.
Credit utilization rate
High credit utilization can hurt your credit score negatively as it would indicate your rising debt burden. It is advisable to utilize only 30-40% of your credit limit. This will help boost your credit score.
Now that you are well aware of various factors affecting CIBIL score, ensure that you make a note of it and work towards improving your CIBIL score before applying for a loan.
How to improve CIBIL Score?
- Pay-off Credit Card Bills on time and repay all our outstanding bills
- Inaccurate Appeals against the bureau in case of any discrepancies in your credit report, can get your report corrected
- Using the Oldest Credit Card fetches you better CIBIL score. If you have made timely payments on your credit card, then keep it active as it will give your CIBIL score the required boost.
- Increase the Credit Limit of your Card to show that you manage your finances well and have a regulated spending pattern
- The 30% Rule i.e. spending to 30% of your card’s limit shows that you do not spend much and save well.
- Timely Equated Monthly Instalments Payments show that you are a disciplined borrower.
- More credit accounts in the past or at present signify that you are successful in managing your finances and this helps in improving your credit score.
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