Friday, 29 January 2016

If you have a low CIBIL score, credit repair is a must!


A low CIBIL score while not the end of the world can indeed come in the way of some of your long cherished dreams such as owning a house or going on an overseas vacation. This is because when you apply for a loan – be it a home loan or a personal loan – or a credit card, the go-to documentation for any lender is the CIBIL report, which contains the CIBIL score.
The route to enhance your credit score may not be a quick-fix one, but with some financial discipline and budgeting you can repair your credit. Read on to know more about the impact a low CIBIL score can have on your credit health, and how you can better it.
What exactly is the CIBIL score?
A three-digit numeric representation of your creditworthiness, a credit score is typically ranked between 300 and 900. It tells a lender just how likely a borrower is to default on a loan repayment, or the probability of a loan going bad.
CIBIL is the oldest credit bureau in India, and hence a credit score is often colloquially referred to as a CIBIL score. Credit reports and the scores thereof are made available by any of the other three credit bureaus in the country as well. With CIBIL, a score of 750+ is considered to be a good score.
Credit score and its usage
Globally, lenders use a risk-based pricing model wherein the rate of interest is based on the credit score and this is where having a robust score helps immensely.
Further, credit scores are used to not just check a borrower’s repayment capacity when determining whether to approve a loan, but also in other areas such as insurance underwriting and by telecom operators before providing a new phone connection. Employers too check credit scores as part of the hiring process, especially where the role requires a high level of confidentiality.
In India, the usage of credit scores has not yet matured enough to cover the above scenarios, but it is being religiously used in lending. To bring home the growing emphasis on scores, it is interesting to note that the Reserve Bank of India (RBI) has recently mandated that all banks and other financial institutions necessarily need to be members with all credit bureaus.
Loans and a low CIBIL score
While availing of a loan for low CIBIL score is not altogether impossible, the chances of your being offered the loan or credit card at less competitive terms are unfortunately greater. This is because higher the score higher is the likelihood of a loan with the best interest rate. Naturally, over the long term this helps you save a significant amount of money.
Let us take an example.
Both Borrowers A and B have approached the same housing finance company for a home loan for a 20-year tenure of Rs. 1.0 crore each. Borrower A has a CIBIL score of 800, while Borrower B has a score of 700. Let us see how the EMI differs as a result of the difference in interest rates. Borrower A is offered the loan at 10.40 percent, which makes his monthly outgoing approximately Rs. 99,000 while Borrower B has to pay about Rs. 1.13 lakhs per month, at an interest rate of 12.50 percent. Hence, over the tenure of the loan, A will save a large amount of money compared to B. Hence in this instance while both Borrowers A and B will wind up owing their dream home, the acquisition cost for Borrower B is much higher – a situation that may have been sidestepped with a better score.
However, on the other hand, the likelihood of your application being rejected also exists. Keep in mind though that the credit score is not read in isolation, a lender also takes into account other parameters such as your income, other monthly commitments as well as any other debt you may have availed of.
It just doesn’t end here. Over a lifetime, you may choose to avail of a loan or credit card more than just the one instance. With a poor score, you may just be closing the door to future debt, even when you require it the most. A case in point is an education loan, which serves a specific purpose at a specific time. If you cannot avail of this loan at the crucial time of your child’s education it defeats the purpose. And unfortunately, a low CIBIL score can lead to precisely such an eventuality.
On a more personal note, a poor score can also affect the relationships that matter the most – when you marry someone, while your spouse’s credit history does not get tagged on to yours and vice versa (until you avail of a joint loan), carrying a burden of unpaid debt from the past can seriously put a strain on the strongest of relationships.
While not directly then, a poor credit history will also have an effect on your physical health. Owing to sheer stress brought on by mounting bill payments, high interest rates it is possible that one might additionally suffer from ill health, apart from being financially unhealthy to begin with.
In conclusion
It is never too late to take corrective measures and work to enhance credit score. The first thing to do would be to avail of the services of a credit health management company such as Credit Sudhaar that can work with you to better your score.
Remember there is no reason to lose heart, but that said credit repair is a must. Don’t let your financial (and possibly personal) life suffer on account of a low credit score.

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