Having learnt last week what a CIBIL Score is, let’s understand how it is used and why it is so important to have a good Credit Score. A Credit Score is your ‘reputational collateral’. It indicates your creditworthiness; a high Credit Score indicates you have managed your credit obligations efficiently and are likely to continue to do so.
Though the CIBIL Score and the Credit Information Report (CIR) are most often used by banks and financial institutions to evaluate loan or credit card applications, they are increasingly also used by telecom operators.
What do lenders look for in your Credit Information Report (CIR)?
- Debt-burden ratio : This ratio indicates how ‘leveraged’ you are. For example, if your total income is 30,000 with an EMI of 4,000 on an existing car loan, your total monthly EMI would be 10,000 if you’re seeking an additional loan at 6000 EMI. The debt-burden ratio would be 10,000/30,000 or 33%. A higher percentage indicates higher debt and may negatively impact your loan approval. The acceptable debt-burden ratio varies from lender to lender depending on their credit policy.
- Past payment behaviour : Lenders tend to be cautious if your loan or credit card account has been settled/written off or if you have repeatedly been late in paying your dues. It is very important to have a clean credit history.
How and where are the CIBIL Score and CIR used?
- The loan approval process : Your Credit Score is one of the primary checks done by lenders today when evaluating your credit profile. You could say it is the first financial impression the lender will have of you.
- In determining your loan amount or credit limit : Lenders look at the CIR not only in deciding whether or not to extend credit, but also while determining your loan amount/ credit limit. Assuming lenders consider half your income is used for living expenses, the credit eligibility (Cr) of individuals with existing loans will be half of their income (I) minus current EMI. So Cr = I/2 – EMI. So an individual with 50,000 income and existing EMI of 10,000 may be sanctioned a loan for a maximum additional EMI of 15,000; i.e., 50,000/2 – 10,000 = 15,000.
- In managing your existing relationship : Banks and financial institutions may look at your CIR periodically to check your credit health in order to offer better services to you. For example, after reviewing your credit health, they may increase your credit limit if there has been a change in the debt-burden ratio. This enables lenders to deepen their relationship with you.
- Telecom operators : They are increasingly looking at the CIBIL Score and the CIR for determining the credit limit to be granted to their post-paid mobile subscribers.