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One of the most crucial aspects while applying for a loan from a financial institution is your credit score. Also better known as your CIBIL score, it is the single most important criterion that helps a bank or any other credit lending institution decide the amount it should lend you or whether it should lend money to you at all or not.
Maintaining a good CIBIL score is one of the foremost considerations if you plan to take a loan in the near future. It helps the bank assess about your financial capability or soundness to return the money along with due interest within the stipulated period.
When we talk about CIBIL score, one of the biggest impediments that can restrict your credit score is a bounced cheque. While it may have quite an adverse effect on your CIBIL, the same is not the case in all cheque bounce situations.
In this article, we tell you what exactly CIBIL score is and what is the ideal CIBIL score that you should try to maintain. In addition, we also tell you how a cheque bounce case affects your credit score and also figure out the factors that do not have any effect on your CIBIL score.
Simply speaking, CIBIL score is a numeric representation of your credit paying ability or in other words, it denotes how regular you are with respect to payment of debts.
A CIBIL score is calculated and provided by The Credit Information Bureau India Limited (CIBIL).
This credit score considers not only the credit that you have been unable to pay on previous occasions but also takes into account what you currently owe to financial institutions.
The range of CIBIL score varies from 300 to 900. The higher the score, the easier it becomes for you to avail a loan. Anything above 750 is considered as a good credit score.
A situation of cheque bounce arises when your bank account has insufficient funds for withdrawal through a cheque. In such situations, the bank returns the cheque to the withdrawer citing the reason as ‘insufficient funds’.
A bounced cheque can have an adverse impact on your CIBIL score. This can surely create serious problems for you in the future while applying for a loan or a credit card since financial institutions feel insecure to lend to someone who has previously been unable to pay his/her due debts.
It may be pertinent to mention here that your CIBIL score is only concerned about your timely payments and the fact that your cheque has bounced only has an indirect impact on your credit score. This essentially means that if you are able to pay your due instalment or debt within time despite a bounced cheque, your credit score does not go down since your ability to repay is affected in no way. In addition, paying well within time also saves you from unnecessary penalties and default charges.
But, in case your cheque bounces and you are unable to pay within the stipulated period, not only does your CIBIL score plunge but you can also be prosecuted under various provisions of criminal law as well as under Section 138 of the Negotiable Instruments Act.
Therefore, it is always advisable that your bank account should have enough funds before you even apply for the loan so that banks and lending institutions are secure about your financial credibility and do not hesitate while lending you money.
Lending institutions are not at all bothered about your asset allocation or investments. All that they are concerned about is whether you are capable enough of paying your debts within time and in full or not. Most people fear to apply for a loan since they feel that they do not have enough amounts of investments to their credit. However, it may be reiterated that your investment portfolio makes no difference while deciding your CIBIL score.
It may be interesting to note that banks prefer applicants who have previously opted or availed loans either from the same financial institution in which they are subsequently applying or from another financial institution. This is because it helps them gauge their financial soundness and decide if it is really worth lending money to the applicant. However, banks may be reluctant to lend to persons who haven’t previously obtained loans at all since it might give them no indication of the credit worthiness.
It is therefore often said that a proven clean track record of payments of debts is always preferable than having a zero credit history.
For those of you who think that previously obtained loans make them ineligible to opt for subsequent loans, it should be understood that as far as you are regular with your payments of EMIs, obtaining a successive loan does not adversely affect your CIBIL score.
Having a low balance in your bank account is no reason to reduce your CIBIL score. Usually, account holders are under the belief that a low balance in their bank account would make their CIBIL score plunge. However, it should be realised that a CIBIL score is only for knowing about any credit and its repayment by the borrower and is not concerned with the amount of balance that the account retains. However, from a personal perspective, it is only in good stride that any inoperative savings accounts are taken care of from the view point of financial control.
Another misconception with respect to CIBIL scores is that the credit score of your spouse affects your own score. However, it may be clarified here that such is not the case unless a joint loan is being obtained by both, the husband as well as the wife. Lenders should know that a husband and wife are separate legal entities when it comes to finances and the performance of a spouse with regards to payment of credit does not affect the other.
It is also recommended that a joint loan may only be obtained when there are tax benefits or where the spouse is a working professional since such an advantage enhances your joint CIBIL score.
Some people also fear that having multiple credit cards would deter them from availing loans and would have a negative impact on their CIBIL score. However, essentially, if a person pays his/her credit card bills in time and in full, having multiple credit cards cannot be a deterrent while availing loans. In fact, it only helps the financial institution get a better idea of your financial payment regime and thus helps them serve better.
Does CIBIL maintain a defaulter list?
No, CIBIL does not maintain a defaulter list or ‘good’ or ‘bad’ creditors list.
Is there an ideal CIBIL score?
There is no ideal CIBIL score that one can achieve. Simplistically speaking, the closer you are to the 900 point benchmark, the easier it becomes for you to avail loans without any trouble or hassle.
What are the ways to improve CIBIL score?
CIBIL score can be improved in the following ways:
Is CIBIL score the only deciding criterion while giving loans?
No, CIBIL score is only one of the major factors which decide your loan application. Financial lenders also consider your income, your regular spending, etc. while giving loans.
Does having a low CIBIL score means no loan can be availed?
Well, banks do not strictly put a bar on the borrower availing loans in case he/she has a low CIBIL score. The only brunt that the borrower has to bear is pay high interest rates and other related charges while repaying the loan EMIs.
Can CIBIL make corrections in the credit report of the borrower?
No, CIBIL has no authority to do so unless it is formally authorised by the financial institution. It only facilitates lenders to know the financial capacity of the borrower.
Does CIBIL only help financial institutions?
No, it also helps borrowers by ensuring that the process of lending and borrowing is transparent and ensures that borrowers can keep a watch on their credit situation thus helping them make wise financial decisions.