How High CIBIL Score does not guarantee a loan or Credit Card

Yes, the above headline is true. At times, even a good CIBIL score cannot guarantee a loan or credit card. Rejection for credit not only depends upon your CIBIL score alone, but it has got to do with your entire credit history. Thus, for you as a borrower, it is important to understand your credit behaviour.

What is Credit Behaviour?

Credit behaviour is simply how you manage the money that you have borrowed. Good credit behaviour is when you pay all your debts and EMIs on time. Banks look at you as a potential credit-worthy customer. When you default in managing a loan or credit card payment, banks and financial institutions rate this as bad credit behaviour. Therefore, a high CIBIL score is a good score but if your credit behaviour is bad, your loan application is bound to get rejected.

A credit score is a 3-digit rating score, it is highly complex and dependent upon a lot of factors such as your payment history, current loans, credit utilization, etc. A credit score is issued by CIBIL based on its own proprietary algorithm and software.

To understand this better, let us illustrate an example.

Assume that for you to make your car eligible for an insurance, there are five parameters, for which you are required to generate a cumulative score. Consider that these five factors are fuel, battery, tyre, mileage and age. The eligibility criteria for a car insurance requires you to have a minimum score of 20. This means that if you have scored bad in one parameter (fuel - where your score is 3) but good in the remaining four, and your total score is 20. You are most likely to obtain a car insurance based on your cumulative score of 20.

But when it comes to a car insurer, they require a minimum score of 6 in each parameter. Thus, a score of 3 will not be accepted and will most likely reduce your chances of eligibility even though you have met the cumulative criteria of 20. Therefore, even if your score is 20, you are still not eligible because of your bad performance in one of the parameters.

Now, you need to look at this from the perspective of your credit behaviour. That is, we switch the parameters with factors that influence credit behaviour and the CIBIL score is cumulative in calculation. Thus, you may have a good CIBIL score but the factors that influence credit behaviour might be bad. Therefore, it is good to maintain a high score on all individual parameters.

A non-performing asset (NPA) refers to a loan or an advance, for which the repayment has not been made post the due date of 90 days. It is considered as a bad debt with respect to the scheduled payments of principal or interest.

Example, if a company with a ₹10 million loan with interest-only payments of ₹50,000 per month fails to make a payment for three consecutive months, the bank will label the loan as non- performing as per their guided rules and regulations. A loan can also be categorized as non- performing if a company makes all interest payments but cannot repay the principal at maturity.

Recently, NPAs across India stand at ₹10 lakh crore. This is highly dangerous for the financial health of our country and has eaten away a chunk of India’s GDP. Due to this, banks are under a lot of pressure from the RBI to control the rising NPAs. Thus, banks are more likely to reject a loan or credit card application if they doubt your capability to pay back a loan. Thus, banks are focusing more on credit behaviour and the credit score.

Follow these steps to improve your credit behaviour.

• Account history - Once you have your credit report, search for accounts that are due for payment. Ensure you pay the full amount outstanding on each of your accounts on or before the due date.

• Credit utilisation - Keep your credit utilisation ratio to 30%. For example, if you have a credit card or a store account with a limit of ₹1 000, try to maintain the amount owing balance at under ₹350.

• Misinformation - Look for any errors and false information within your credit report and take active steps to pay all your outstanding debts in full so that this information can be removed from your credit report. You can always contact CIBIL for this.

• Credit mix - Maintain a healthy credit mix of secured and unsecured loans. This will establish a strong financial history.

• Additional credit - Try not to apply for too much for credit at the same time. Too many simultaneous applications could indicate that you are a credit hungry person.