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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.

Credit Utilization and Credit Behaviour

Credit utilization means the amount of credit you have used as expenses with respect to your credit card balance or limit. It also takes into consideration the existing credit limit that’s being used. For example, if your balance is ₹300 and your credit limit is ₹1,000, then your credit utilization for that credit card is 30%. It is advisable to keep your credit utilization ratio to less than 30%. Your credit score can be drastically affected if you have a habit of utilising your credit limit more than 30%.

Let us assume that your CIBIL score was 800 six months ago but due to your habit of excessive credit utilization, it has dropped to 750. We all know that banks and financial institutions require a minimum score of 750 in order to issue an extended line of credit. For the bank, an excessive credit utilization is risky business as more and more money is going out faster than coming inside the system. This is looked upon as one of the parameters of bad credit behavior. Hence, your loan application is likely to be rejected.

Non-Performing Assets or NPAs

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.

What if your Loan gets Rejected?

If you have a good CIBIL score but your loan application gets rejected, you should immediately raise the concern with the respective bank. The bank will tell you the exact reason why your loan has been rejected. Think of this as a benefit rather than a loss. You will get help in figuring out what is wrong with your credit behaviour and now you have a chance to rectify it. Last but not the least, apply for a loan in the next few months cause if you apply for one immediately post rejection, your CIBIL score will get affected.

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Improve your Credit Behaviour

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.

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FAQs on How High CIBIL Score does not guarantee a loan or credit card

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What is a credit score for credit rating?

A credit rating is a number computed by an approved credit rating agency and it provides a snapshot of the credit worthiness of an individual. This score is also known as a CIBIL credit score. A good credit score for credit rating is 750.

What is a credit information report?

A credit information report contains details of your credit history and tracks record in taking and repaying loans from banks. Credit bureaus like CIBIL, Equifax and Experian consolidate every individual’s borrowings, credit history sourced from different member credit institutions such as banks into a single report called as credit information report (CIR).

What causes bad credit history?

To name a few, Irregular Payment history, Write-offs and Settlements and a high number of enquiries can cause bad credit history.

How long does it take for credit repair?

It can take you a minimum of 6 months or more for adequate credit repair,depending on how bad your current score is. It usually takes around a few months to increase a score from 600 to 750, provided you have maintained good credit behaviour. There is no overnight formula to increase your credit score rapidly.

Who issues a credit score or credit report?

A Credit score can be issued by any of the four main credit rating agencies in India. The four credit bureaus are CIBIL, Equifax, CRIF HighMark and Experian. CIBIL score is considered to be the most popular and prominent across India for credit rating.

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