A Loan is a financial instrument which you use when you have any kind of financial emergency. But before you can use this productive instrument you have to be scrutinized properly by the bank and only if you tick the 5 important boxes, you will be given the chance to use this.
First of all, to get a loan sanctioned for yourselves you have to score high in the range of 300 – 900, which is popularly known as a CIBIL Score which is used to measure the creditworthiness of an individual. This score is formulated by some of the leading credit bureaus in India such as TransUnion CIBIL, Equifax, Experian India, etc. In India, most of the banks use CIBIL Scores compiled by TransUnion.
A score of 700 and above is considered good and that person automatically gets eligible for the loan. A good score can get your loan approved faster and a bad one can really ruin your chances of getting a loan approved.
There are some factors which affect this score. These factors have to be taken care of properly in order to formulate a nice CIBIL Score make yourselves eligible for loan approval.
These factors are:
1) Outstanding Balance – Details regarding your previous Loans
The outstanding loan balance is the first and foremost factor which is to be taken care of. This is a very important factor influencing your credit score. Your past records must definitely be clean before going for a loan. This information is used by the lenders to determine your Credit Utilization Ratio (CUR). CUR is the ratio of the outstanding balances to the credit limits. In the case of Home Loans and the term loan, the ratio will be very high.
Usually, lenders are more interested in the CUR of your Credit Cards accounts. A higher proportion shows that you are inefficient in managing your credit and on the other hand a ration with no results is an indication that you are stable regarding your finances and that you do not require much credit. Therefore, it is better to maintain a proportion of around 15% to 30% so that you are not in trouble in case of an emergency.
2) Repayment History- Ability to clear the loans
Albeit a very important factor which determines your credit availing ability. A bank would never want to enter into a wasteful venture where the recovery of its fund uncertain.
This repayment report shows the health of your previous credit undertaking. This data actually shows the time period in which you are paying off your credit dues. The details show the delayed period of the payment as well as the number of reminders given to the borrower in case of any default for paying off their loans which can be any kind such as a particular loan installment or Credit Card Debt.
Time is precious and the more time you take; you give the authorities to prepare a more derogative report on your credit standing. Default of one month or more is a matter of concern for the bank and this will bring down your CIBIL Score.
3) Secured Credit vs. Unsecured Credit
A perfect balance is what someone looks for before going for anything and it’s the same for the banks as well. There are many kinds of loans such as home loan, property loan, credit cards, and personal loans and so on. Among these, some are secured and unsecured and a bank seeks an equal amount of both.
Using multiple credit card also has a positive impact on the credit score but multiple defaults will definitely ruin the score. Basically, you have to maintain your CUR and banks focus more on how you pay off your unsecured loans than your secured loans.
4) Loan History- Your bank has to have details regarding your previous loans especially your credit card details in order to chalk out your credibility as a borrower and this affects your credit score. You may be a first-time borrower with no history and thus with a score of -1. The best way to build upon this is to construct a credit history for the last 6 months by taking loans of a secured or unsecured type of small amounts.
The best way can be to apply for credit cards of a secured type which will help you to build a history very easily.
5) Enquiries that you make
Banks also keep a check on the credit enquiries that you make with them. This report basically shows a list of queries made by banks on your account.
The higher the number of recent investigations, the more desperate you are for credit. Queries for secured loans are fine but what matters is the queries for unsecured credit such as Credit Card and Personal Loan. If you have more queries regarding these, the banks term you as a risky borrower thereby affecting your credit score and thus impacting your loan approval.
Thus, we saw the factors which will affect your CIBIL Score which is the sole benchmark for your lender to consider you as a borrower.