What is Credit Appraisal

A credit appraisal is an assessment or evaluation process based on which the lender/issuer determines whether to increase your credit limit. It is a comprehensive check of your creditworthiness and associated lending risk. The appraisal enables lenders/issuers to check your repayment ability and decide accordingly. The evaluation is done based on several factors such as your income, assets, existing debts, credit history, and so on. Let us understand the process of a credit appraisal in further detail.

There is a 5-step process set in place for lenders/issuers to thoroughly assess your credit application and creditworthiness for a credit appraisal. These are as follows:

Review of Application

Initially, the lender/issuer carefully examines your application for an appraisal. This includes confirming your personal details and financial information. Any missing or inconsistent information could hold up the process. Thus, a complete and accurate review helps prevent delays or rejection.

Verification of Documents

Alongside the application, you are usually required to submit certain documents. These usually differ depending on the type of loan or credit card you opt for. Some common paperwork you may have to furnish include:

• Identity Proof

• Address Proof

• Income Proof

• Bank Statements

• Business Proof

• Property-related Documents

 

These documents are verified by the lender to get a better understanding of your financial profile. It helps the lender/issuer assess your eligibility for a loan/credit card and accordingly provide an offer. Sometimes, the credit provider may request you to provide additional documents. Promptly submit these to ensure a seamless and quick process.

Financial and Credit Analysis

After you have submitted the documents, your existing debts, finances, and credit history are evaluated by the issuer/lender. This is usually done by accessing your credit reports from TransUnion, Equifax, CRIF High Mark, and Experian. This enables the issuers/lenders to assess the default risk related to offering a higher loan or credit card limit. 

Creating the Offer

Once your credit analysis is completed, if your risk profile and financial situation are deemed favourable, an appraisal is offered. Depending on how well you meet the set eligibility criteria, the borrowing terms are decided. Herein, your credit limit, interest rate, and repayment period may be revised. This is subject to the policies of the credit card issuers and loan providers.

Credit Approval

After the offer is created, the lender/issuer approves the credit and usually drafts a new agreement. This document is then shared with you. Be sure to check all the terms and conditions mentioned in the agreement. If you agree with all the terms mentioned, sign the document and send it back to your lender/issuer.

Here are some things that can help you become eligible for a credit appraisal:

Credit History

A strong credit history reflects good financial health and responsible debt management

Stable Income

Your employment history and income level influence your credit eligibility

Debt-to-Income (DTI) Ratio

A low ratio signals fewer debts, indicating better repayment capacity

Loan-to-Cost Ratio

This ratio shows how the credit amount compares to your expenses, helping issuers/lenders set appropriate credit limits

Collateral Offered

For secured loans, lenders assess your collateral’s value, which can help reduce the risk associated with the lending

Some advantages of getting a credit appraisal are as follows:

Enhanced Purchasing Power

A higher credit limit allows for more flexibility in spending

Potential to Improve Your Credit Score 

Responsible use of an increased limit can positively impact credit scores

Better Financial Cushion

Extra credit can act as a safety net for unexpected expenses

Lower Credit Utilisation Ratio

A higher limit lowers the credit utilisation rate, improving credit health

Increased Rewards and Perks

With higher limits on your credit cards, you can enjoy additional rewards, cashback, or loyalty benefits

Reduced Borrowing Costs

Having access to higher credit can reduce the need for high-interest, short-term borrowing options

Lenders/issuers usually consider the following factors for a credit appraisal:

Credit Profile

A robust credit history and score demonstrate financial responsibility and build lender trust. Timely payments, low credit utilisation, and a variety of credit accounts create a favourable credit profile. Lenders prefer borrowers with a balanced mix of credit, like loans and credit cards, as it shows experience managing different types of debt. A higher credit score can lead to better terms and higher limits. However, recent defaults or high credit utilisation can hurt your appraisal. In India, many lenders and issuers check the credit score issued by TransUnion CIBIL, one of the four registered credit bureaus of  India. Maintaining a CIBIL score above 750 is considered ideal and typically strengthens your chances for an increased limit.

Income

Your income level is an essential indicator of your ability to repay debt. Higher earnings suggest you can handle a larger credit limit, making lenders more willing to approve an appraisal. Stable income sources, like salaried jobs or regular business revenue, increase your reliability. Seasonal or fluctuating income can lead to stricter checks. For high-limit approvals, lenders look for proof of a steady cash flow.

Debt and Expenses

The Debt-to-Income (DTI) ratio shows what part of your income goes towards existing debts. A lower DTI indicates fewer financial obligations, which increases your chances for a higher credit limit. Lenders/issuers want to see that you are not financially burdened, which can be proved with a low DTI ratio. Similarly, the loan-to-cost ratio is also considered when assessing your creditworthiness. The ratio is a comparison between the borrowed amount and the expenses related to the loan’s purpose. Lower ratios show you need a lower credit for a purpose, reducing the lending risk. Managing these ratios well reflects financial discipline and the ability to handle higher credit limits.

Employment

Job stability is crucial to highlight your ability to make consistent repayments. If employed full-time with a reputable company, your profile is deemed as less risky. Long-term employment in the same role or field can significantly boost your eligibility for an appraisal. They may also view government or public sector employees more favourably. This is because such jobs are generally considered to be more secure than businesses. For self-employed individuals, lenders/issuers may require additional income proof. This is due to the variable nature of business income. If you have a solid work history, it can make a strong case for higher limits.

Age

Younger applicants tend to have limited credit history, which could lower approval chances. Meanwhile, middle-aged borrowers are typically in their peak earning years. Lenders may favour this age group for increasing the credit limits. Those nearing retirement may face restrictions due to potential income reduction. If you’re younger, a solid repayment track record and focus on other parameters can help offset limited credit experience.