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Rediff.com  » Getahead » Are you a good borrower?

Are you a good borrower?

By Manavjeet Singh
Last updated on: June 09, 2015 17:26 IST
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Find out how banks and lending institutions decide if you are worth their money based on your CIBIL TransUnion Score and Credit Information Report.

Byomkeshda has applied for a personal loan. While he is a master in unearthing all conspiracies and mysteries, he is unable to figure out whether he will get the loan or not. That was when someone suggested Byomkeshda to check his CIBIL TransUnion Score, and told him that if his CIBIL Score is above 700 then he would get a loan. Byomkeshda was unaware of what a CIBIL Score was all about and how does it determine an individual's creditworthiness.

Before August 2000, if any individual had to apply for a loan, the bankers did not know whether the person had a good credit standing and credit history.

This was when the Reserve Bank of India (RBI) proposed to set up CIBIL (Credit Information Bureau of India Limited) to collect credit records of all borrowers from all banks, compile and organise the data, and then disseminate the organised data to all banks. CIBIL was established as the central recorder of the credit information of all the borrowers in the country and since then it has been disseminating compiled analyses in form of Credit Information Report (CIR) and CIBIL TransUnion Score.

Hence a good credit score is very important to get the desired loan amount and better interest rate. At the same time CIR also plays a key role in helping bankers manage their lending operations and also helps potential borrowers secure credit faster and at better terms.

Let me help you understand how it works. Say, Byomkeshda applies for a loan with a bank. Bankers will immediately request CIBIL for Byomkeshda's CIR. CIBIL TransUnion Score comes in three digit numericals ranging from a score of 300 to 900.

A score of 300 means the lowest credit score, and 900 is the best score. Bankers prefer to lend to borrowers with a score above 700.

Listed below are couple of points that will help you understand what determines your score:

  • Your track record of late payments, defaults, and timely and diligent payment of loans and credit card loans with all banks
  • Record of loans and credit cards that you hold
  • Number of loans and credit card applications made by you

This is how the aforesaid information impacts your credit score:

  • If your track record shows timely payment of credit card dues and repayment of loans, then you would earn a higher credit score and vice-versa
  • However if you have many cards and has huge outstanding then the lender would have concern on your repayment ability which can reduce your credit score
  • Also, if you have been applying for loans and credit cards from many banks, it will reflect upon you as being credit hungry and can hurt your credit score

This CIBIL TransUnion Score and the CIR helps bankers quickly decide whether the applicant has a healthy repayment history, and whether or not the applicant is over leveraged (borrowed more money than one's repayment capacity) because that can impact borrower's repayment capacity. Repayment and default history of borrower is also captured.

Once the banker is comfortable with your credit score, s/he would decide to further evaluate the loan application based on documents like income proof, income tax returns, KYC (know you customer), etc. In other words, your score is the first and biggest criteria for bankers to decide whether they want to lend to you or not.

However, it is worth noting that if any potential borrower doesn't have a credit history, then it does not translate into a higher credit score. CIBIL tracks repayment history and credit worthiness of the borrower. So a prompt repayment history on multiple loans carries higher weight than not having any loan.

To sum up, CIBIL TransUnion Score and CIR are a boon for bankers and borrowers. This helps the bankers to quickly evaluate borrowers' credit worthiness and process loan applications. It has also enabled the borrowers to keep a track of their credit history and correct any error that reduces their score.

Illustration: Uttam Ghosh/Rediff.com

Manavjeet Singh, is Founder & CEO of Bestdealfinance.com, an exclusive online platform for comparing loans (SME and retail).

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Manavjeet Singh