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A simple guide to understanding your CIBIL score

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The last couple of years have seen an increase in low cost loans for a variety of reasons. Job losses, wage cuts, medical emergencies, rent deposits, refresher courses and the like have prompted millennials to opt for such loans. A spike was also seen in short-term loans in cities due to the tightening of economic activities leading to financial difficulties.

TransUnion CIBIL Ltd and Google reported that over 60% of all personal loans created in the fourth quarter of 2020 were under ??25,000. According to the 2020 borrower profiles, 49% of first-time borrowers were under 30 years old, 71% lived in non-metros and 24% were women. This changing trend is also prompting fintech companies to target the younger age group.

As a borrower, one should be aware of the factors that affect the credit rating. Credit reports are detailed descriptors of your credit history. Hence, it is imperative to maintain a healthy credit rating. However, what is a CIBIL score? How is it calculated and what are some of the key factors that determine the score. Let’s find out.

What is a CIBIL score?

Simply put, a good CIBIL score is the numerical sum of a client’s credit history, credit score, and report, ranging from 300 to 900. A score above 750 is considered healthy and a credit score is considered healthy. lower than this is considered alarming. Having a good credit rating guarantees hassle-free loan processing. It gives an advantage to customers, especially when it comes to interest rates. Borrowers with a good score can sometimes qualify for loans at lower interest rates than others. While lenders consider several other parameters before disbursement, the credit score plays a fundamental role in the approval process.

How to access the CIBIL system?

The process of registering oneself or one’s company on CIBIL begins with the creation of an account on the official myCIBIL website. After creating an account, it is mandatory to upload documents such as proof of identity and address, electricity and telephone bills, etc. Once registered, it is crucial to keep track of your credit score. Timely payments of loan maturities, choosing deferred payments, regular credit score checks, and on-time credit card payments are some of the ways to maintain a good credit rating.

What are the factors that determine your credit score?

Payment History: As mentioned earlier, it is extremely important that borrowers are on time with loan and credit card payments to maintain a good credit rating. Lenders assess payment history before approving your loan application. CIBIL’s analysis reveals that 30-day delinquencies can lower a borrower’s score by 100 points, which can potentially damage their score. It is essential to make sure that your payment history does not reflect an inconsistency in terms of loan repayments.

Securing a “credit mix”: there must be a balance between the borrower’s secured and unsecured loans. While loans like home loans fall under secured loans, credit card purchases fall under unsecured loans. If the borrower has taken out only one type of loan more than once, it can negatively affect their credit rating. A healthy balance of different types of loans is considered desirable by lenders. This suggests that you can effectively handle different types of loans.

Corrective Actions: If a borrower’s credit rating is low, they can take corrective action to get them back on track. For example, instead of just paying the minimum owed, it’s important to clear all credit bills. This will not only reflect well on the credit report of the borrower, but will also help them qualify for lower interest rates on the loans.

Can I benefit from a loan without being affiliated with the CIBIL system?

It is possible to benefit from the credit without having a registered CIBIL score. This is made possible through loans that involve insured assets. Loans for gold, for example, do not require the borrower’s credit rating as a prerequisite.

The only deciding factors in the case of an insured gold loan, are the purity of the gold metal and the amount of the collateral itself submitted. Home equity loans also fall into a similar category. However, although a credit score is not necessary to qualify for a gold loan, late repayments can have serious consequences on a borrower’s credit rating.

It should be noted that refunds or installments should be treated with care in either case. Defaulting and irregular payments will further influence your gold loan and lower your credit score.

Yashwardhan Aeren is Co-Founder and Chief Growth Officer, Ruptok Fintech Pvt. Ltd.

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