What Is the Role of CIBIL Score in the Loan Application Process?

When you are applying for a loan or a credit card, one of the first things you should consider is your CIBIL score. While there are several factors, such as age, income, and work experience, that affect your loan approval, the CIBIL score is arguably one of the most important factors. But what exactly is this score, and why does it matter so much in the borrowing process? 

This article will cover what the CIBIL score is, its importance, and the role of CIBIL score in the loan application process, along with tips to improve it.

What is a CIBIL score?

A CIBIL score is a 3-digit numerical summary of your credit history. This is used by lending institutions to determine an individual’s creditworthiness. Based on this, lenders give access to different loans and credit facilities, along with other factors such as age and income. 

This score is generated by TransUnion Credit Information Bureau (India) Limited, one of the leading credit bureaus in India. It is based on an individual’s credit information that they receive from various lending institutions. The factors that affect a CIBIL score include repayment history, credit utilisation ratio, credit mix (unsecured and secured credit), outstanding debt, and more.

In India, the CIBIL score typically ranges from 300 to 900. The closer your score is to 900, the better your chances of loan approval, as long as you meet other eligibility criteria. 

Importance of CIBIL score in personal loan applications

A good CIBIL score can speed up your application process. As it is an indicator of responsible financial behaviour and creditworthiness, you may even have negotiating power to get favourable loan terms like low-interest rates and flexible loan tenures. On the other hand, a low CIBIL score can lead to either loan rejection or stricter terms like high interest rates. 

While different lenders have different requirements for a minimum CIBIL score for personal loan applications, a score of at least 750 is generally required.

Important factors affecting CIBIL score

The major factors that affect the CIBIL score include payment history, credit utilisation, existing debts, multiple credit inquiries, and potential errors in the CIBIL report.

1. Payment history 
Timely payments of EMIs or credit card dues can improve your score, while late payments or defaults can lower it. Setting up reminders is advisable to avoid missed payments due to forgetfulness.

2. Credit utilisation
Higher utilisation of your available credit limit can reduce your CIBIL score. This is because it indicates that your debt burden may increase over time, increasing the risk of loan default.  An ideal credit utilisation ratio lies at 30% or below. 

3. Existing debt
High outstanding amounts of debt can negatively impact your CIBIL score. It is advisable to clear out any existing debt before taking on new debt.

4. Multiple credit applications
Multiple applications within a short time can lead to a hard inquiry for every application, which can reduce your CIBIL score.

5. Errors in the CIBIL report
It is important to check the CIBIL reports periodically. This can help with the early detection of errors that could be hurting your score. If found, promptly raise a dispute with CIBIL to get them rectified.

Role of CIBIL score in personal loan application process

The role of CIBIL score in the personal loan application process is significant. This is how:

• Initial assessment: One of the first things lenders look at in your application is your CIBIL score. This helps them decide how creditworthy you are.
• Loan approval: A good CIBIL score can improve your chances of getting a loan approved as it signals responsible financial behaviour.
• Interest rates: Lenders may charge higher interest rates when they are not too confident about the borrower’s creditworthiness. A good CIBIL score can help you secure lower interest rates.
• Loan amount: It can impact the overall loan amount you qualify for, with a good CIBIL score leading to higher loan amounts.
• Processing time: A good CIBIL score, along with a strong application that fits a lender’s eligibility criteria, can significantly speed up loan processing.

How to check your CIBIL score

You can check your CIBIL score by following these steps:

• Visit the official CIBIL website.
• Look for the option ‘Get Your Free CIBIL Score’ or similar.
• Enter the details required and set a password to register. These details can include your name, address, etc. 
• You should receive a One-Time Password (OTP) to your registered mobile number. Type in the OTP.
• Once the verification is complete, you can access your CIBIL score and a detailed credit report.
• Alternatively, you can check your CIBIL score on websites or mobile applications of financial institutions that offer this service. You will likely need to register and follow similar instructions to get your CIBIL score.

Importance of regularly monitoring your score

Checking your credit score regularly can help with the following:

• You can identify any errors in your credit report that could lower your score and take prompt corrective action.
• You can better understand how lenders will view your application and take steps to build a stronger credit score and history.
• You can monitor any unauthorised changes in your score that could indicate fraudulent activities.
• You can gain the knowledge to make smarter decisions by understanding how different financial decisions can affect your creditworthiness.

Tips to improve your CIBIL score

Here are some actionable tips to improve your CIBIL score:

• Make sure to pay your EMIs, credit card dues, and utility bills on time and in full.
• Avoid using too much credit against the limit available to you. Keep the credit utilisation to 30% or below.
• Check your CIBIL score and report regularly to detect and correct any potential errors. Raise a dispute with CIBIL immediately if you find any.
• Avoid applying for too much credit in a short time frame, as this can raise multiple high inquiries and indicate a severe need for credit.
• Work on paying off existing debts, especially high-interest ones like credit card debt. Reducing your overall debt load can improve your credit score.
• Taking advice from a professional can also help you better understand your CIBIL score and further improve it. 

Conclusion

Understanding the CIBIL score is crucial for anyone wanting to apply for a loan or credit, as it is one of the biggest indicators of creditworthiness to lenders. A good CIBIL score can lead to faster loan approvals and lower interest rates, as long as you meet other eligibility criteria. Making timely payments, limiting credit utilisation to below 30% of the available limit, and monitoring CIBIL score regularly can help you build a strong financial profile.

At SMFG India Credit, the minimum CIBIL score required for a personal loan application is 750. Along with low interest rates starting at 13% per annum* and flexible tenures up to 60 months*, our online portal makes loan application hassle-free. Apply now or contact us to know more!