Introduction
A borrower’s credit score plays a vital role in determining his/her creditworthiness. The CIBIL score is a 3-digit score issued by authorised credit rating agencies. It is based on an individual’s loan repayment history and ranges between 300 to 900, 900 being the highest. As part of TransUnion, CIBIL is an agency approved by the Reserve Bank of India for credit ratings. CIBIL receives financial data of business entities and individuals from various banks and non-banking finance companies (NBFCs) which it uses to determine their credit score.
Banks and NBFCs conduct a credit score check before lending to an applicant, indicating the potential borrower’s creditworthiness. Quite obviously, a good CIBIL score ensures ease in procuring finance. However, a low CIBIL score can sometimes act as an impediment in arranging funds, especially when you need them the most. The CIBIL score is an indicator of the applicant’s loan-repayment capability. It assures the lender of loan repayment.
Let us understand the different credit scores
- Credit scores in between 300-649
Such a low credit score indicates a dismal credit history, i.e., the borrower might have defaulted in repaying the previously-approved loan or the credit card bill. It reduces the trust in the applicant. The chances of getting the loan approved with such a CIBIL score are nearly difficult as it involves high risks for the lender.
To reduce the risk, some lenders may provide the required loan against a third-party guarantee or a collateral. In such a case, if the borrower is unable to pay the dues on time, the lender will approach the guarantor. Alternatively, some lenders might provide a small amount of loan at a very high-interest rate.
- Credit scores in between 650-699
This is considered as an average credit score. It indicates the borrower was neither too good nor too bad with the loan repayment.
A borrower with an average credit score also faces difficulty in securing a loan. Yet, it is not as bad as the lowest credit score range. Some lenders may, however, offer a loan at a higher rate of interest, higher premium, and the terms might unfavourable to the borrower.
- Credit scores in between 700-749
This score is considered as a good credit score. Most individuals’ CIBIL score lies in this range.
Borrowers with such credit scores have a better chance to get their loan approved as compared to the above-mentioned ranges. However, even if the credit score is good, the lender may demand collateral or a personal guarantee.
- Credit score above 750
A borrower with a credit score above 750 is considered ideal by all loan providers. Lenders often provide instant or pre-approved loans to individuals with such a high credit score. It benefits the individuals to procure funds at lower interest rates and lower processing fees. The amount approved may also be higher.
Conclusion
The financial institution will do a credit score check before approving any loan application. A good CIBIL score is anything between 750-900. A borrower with higher credit score gets benefits over the borrower with a lower credit score in terms of faster loan sanction, better interest rate, higher loan amount, longer loan repayment tenure, lesser processing fees.
Credit scores are fluctuating. If your credit score dropped down due to a genuine financial crunch, it can be improved over a period of time. However, individuals must make all efforts to maintain a healthy credit score.
