Creditworthiness

For example, if Ajay has a CIBIL score of 700, he is deemed to be highly creditworthy. Thus, if he applies for a loan, he can be granted ₹50,000 at an interest rate of 11%. If Bharat has a CIBIL score of only 600, he is deemed to be less creditworthy. Thus, if he applies for a loan, he will be offered a lesser amount, of say ₹ 10,000, at a higher rate of interest of 20%. Thus, over time, Bharat will have to pay more interest compared to Ajay.

Thus, it is vital that you keep a track of your CIBIL score, as it is the deciding factor when it comes to seeking a loan. It contributes towards deciding how much loan amount you will be approved for, as well as the rate of interest applicable. To keep a track of your credit score, you can make use of free credit monitoring websites such as Credit Karma or Credit Sesame (the latter being the best source at the moment).

Additionally, if you take a longer time to repay your outstanding dues, and if the number of your unpaid bills piles up, your credit score will fall. Your repayment history contributes to 30% of your credit score. Hence, you must make sure that you repay your dues on time, and do not default on the same.

• The Utilisation of Credit: 

Another important factor that determines your creditworthiness is your credit utilisation. This factor makes up 25% of your credit score. Additionally, if a certain borrower showcases poor spending habits, like ending beyond your means, can also result in a higher ratio of credit utilisation, which can bring down the credit score. When it comes to sanctioning a loan, lenders tend to view a higher rate of credit utilisation as a negative indicator of a consumer’s financial behaviour.

• The Number of Credit Inquiries:

Before approving a loan request, all lenders necessarily check a borrower’s credit report to assess if there is a new enquiry, new loan request, or a new credit card request. This is a deciding factor, as it helps determine the repayment ability of the borrower. If a borrower applies for multiple loans or credit cards on a routine basis, this is a sign that the borrower may not be able to meet  the repayment terms and conditions set by the lender. If you, as a borrower, make multiple and frequent credit inquiries, your credit score can be impacted by up to 20%.

• Credit History Length: 

If you have a long, and stable credit history, it has a positive impact on your credit score, and makes accessing a loan much easier for you. All lenders in the market will be more than willing to approve loans to you if consistent repayment history, over a long duration. Thus, it is advisable to not close old credit cards, even if not used that much and to keep them active to maintain your credit score.

• Credit Mix:

Before approving a loan, a lender will typically check your credit mix of both unsecured and secured loans. Secured loans refer to loans wherein you must offer assets as collateral, such as home loans and car loans. Unsecured loans are loans that do not need any collateral, such as personal loans.