Common Mistakes That Can Mess Up With Our CIBIL Report

Loans are an indispensable part of our lives. As we climb up the ladder, we realize that we are involuntarily tied-up with our banks in form of loans and EMIs. Be it our dream house or the latest car, loans seems to be the easiest way of funding our aspirations. However, it comes as a rude shock if our loan application is rejected by our bank that we have been so loyal to. But ever realized why does this happen?

“Many people simply apply for loan without giving a second thought to how the lender might actually perceive their loan application. The CIBIL Report has been widely used by loan providers to evaluate loan applications for over a decade now. However, only recently have people begun to realize, how crucial it is to be aware of and maintain their credit history,” says Harshala Chandorkar, senior vice president of consumer services and communication, CIBIL.

She further adds that an applicant, before applying for a loan, must evaluate his capacity to repay the loan. “How many other loan payments do you have, and what impact do these payments have on your monthly income? Is your income sufficient to cover your contractual obligations, as well as those other day-to-day expenses?” notes Chandorkar.

Chandorkar also advises that along with one’s own affordability, an applicant must also look at different banks for a better understanding of the different terms and conditions of the loans. “Check for the terms they are being offered and what suits you the best. While the interest rate is important, it may not vary too much between the banks but the customer service, Internet banking facilities and more may vary extensively. These are the things you have to live with for rest of the tenure of your loan.

Similarly, an applicant before applying for a loan should also have a clear understanding of the interest rate being offered on the loan. “For instance what is the base rate and what is the mark up on same to arrive at the lending rate. Have a clear understanding on the interest rate calculation. It will affect your EMIs directly. Also, understand the loan tenure. We tend to go for the longest tenure as the EMIs look more affordable. While this is true, it also means that you end up paying more interest,” she says.

It is important to remember that a bank always looks for both CIBIL report as well as CIBIL TransUnion Score before clearing a loan application. Harshala Chandorkar tells us some common mistakes that you must avoid lest it hampers your credit score:

Late payments or defaults in the recent past

The individual’s payment history has a significant impact on the CIBIL Transunion Score. Hence, if the individual has missed payments on any of his or her existing loans, over the last couple of years, the score is likely to be negatively affected because it indicates that the individual is having trouble servicing his or her existing obligations.

High utilization of credit limits

While the balances on the individual’s loans will only reduce over time as payments are made, he or she must be diligent about making timely payments on credit cards. While increased spending on the individual’s credit cards may not necessarily negatively affect his or her Score, an increase in the current balance on the card over time is an indication of an increased repayment burden and may negatively impact the Score.

Higher percentage of credit cards or personal loans

While a higher concentration of home loans or auto loans (commonly known as Secured Loans) are likely to be more favorable for the CIBIL Transunion Score, a large number of unsecured loans can do the reverse. Although unsecured loans offer easy access to finance, it's also by far the most expensive forms of credit. More the number of unsecured loans with high utilization, larger are the payments resulting from its high rate of interest.

Being credit hungry

If the individual has made many applications for loans, or have recently been sanctioned new credit facilities, a Credit Institution is likely to view the individual’s application with caution. This "Credit Hungry" behaviour indicates that debt burden is likely to, or has increased and the individual is less capable of honoring any additional debt, which is likely to negatively impact his CIBIL TransUnion Score.