Follow these 6 Cs of building good credit and your lender will never disappoint you!
You may have worked hard for a number of days to put together money for the down payment of a particular loan, but doing that is not enough. Unless a prospective bank or financial institution thinks that you are loan worthy by taking a look at your CIBIL score and CIBIL report, your plans of getting access to easy credit, may just get squashed.
So what do you do to ensure that your loan application gets a fair chance? To check how creditworthy you are, you must put yourself in the shoes of the lender and see whether or not you are meeting the essential credit criteria.
Photograph: Omar Bárcena/Creative Commons
With the RBI cracking down on credit appraisal processes of financial institutions, it has become very important for prospective lenders to judge one’s creditworthiness appropriately. Towards this end any lender will also comb through your CIBIL report to see whether or not you meet their requirements. So if you are applying for a loan, or intend to do so in the near future, here’s the mantra you should know -- the six Cs of credit.
Your credit report is a reflection of whether or not you have good credit character.
Good financial credit character is displayed by someone who meets her/his financial obligations on time such as paying credit card bills and other loan EMIs on time.
Even if you are sure that you are doing so, it is a prudent practice to check your CIBIL report at least once annually to see whether everything is in order and your financial obligations appear as they exist in your credit report.
When you make your loan application, your lender will ask you to submit a whole lot of income related documents such as your salary slips and IT returns. This is to judge whether you have adequate capacity or the ability to make a timely repayment of the loan.
A bank will only process your loan application after it is convinced that you will have enough cash left after paying off your current fixed monthly financial obligations.
How much of your income is left once you meet your other debt obligations and paying off your bills? This portion of your income stream will qualify as your cash flow, and the lender needs to be assured that you have enough of it before it approves your loan.
While assessing your loan eligibility, the lender will also look at your capital or the amount you have left after you have met your debt obligations. If you have a property in your name, it will work in your favour.
The lender needs to be assured that you have enough capital to fall back on to be able to handle new credit.
Once again your property, if you own any, can be shown as collateral when you are applying for a loan. In case you cannot make your debt repayments, your collateral will then go under the possession of the bank which will sell it off to repay your loan.
In order to assess your loan eligibility the lender will also scrutinise other conditions such as the stability of your employment. If you have been job hopping too often, your instability will work against you. A prospective lender essentially looks for stability in your job profile and will not be impressed by frequent jumps in your career.
Thus as you see, in order to get timely credit at competitive rates of interest you must meet the credit criteria that have been set by the prospective lender. While each lender has his own methods and criteria to assess whether a willing borrower is credit worthy, following this mantra of six C’s of credit will put you in good stead.
The author, Director & Co-founder of Creditvidya.com, is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.