You might have come across the words CIBIL score whenever you look for information about personal loans.
What is so important about a CIBIL score that it opens gates to personal loans for borrowers?
Why do borrowers and lenders pay so much importance to this number? Let us take a deep dive to find out why a CIBIL score is so important.
A CIBIL score is a numerical score generated by Transunion CIBIL Limited, India’s largest credit information company. It is a measure of the creditworthiness of an individual based on his/her credit history.
CIBIL collects the credit information of every individual from banks and other financial institutions and generates a numerical summary. This is a number between 300 and 900 where 300 is the lower end of the band and 900, the upper end.
A CIBIL score towards the high end of the band indicates the high creditworthiness of the individual and can safely be used by lenders as a yardstick to assess repayment capacity. While a good CIBIL score helps lenders in their decision-making, having a high credit score helps borrowers by opening opportunities for credit.
Let us look at some of the benefits that a good CIBIL score provides to borrowers –
- Better rates of interest
- Credit cards with more benefits and rewards
- Get access to pre-approved loans
- Better tenures on loans
- Faster approval on credit applications
- Better negotiation capacity
- Discounts on loan processing charges
- Higher limits on credit cards
Better Rates of Interest
Everyone seeks cheaper rates of interest on their loans. When a borrower has a better credit score, lenders are more likely to offer better rates of interest on loans as the risk of default diminishes. This gives borrowers the opportunity to avail low-cost loans which is a tremendous advantage in an emergency.
Imagine being caught in an emergency when you are in urgent need of funds. Having a good credit score would help you raise the funds you need without any hassle.
Credit Cards with More Benefits and Rewards
You get rewarded by financial institutions for having a good CIBIL score. A good CIBIL score will give you access to premium credit cards with more benefits and rewards. These cards give you more cashback, higher reward points, and access to first-day sales among other benefits. You will be treated as a privileged customer.
Get Access to Pre-Approved Loans
Having access to pre-approved loans will give you an open line of credit at all times. If you have a good credit score, you don’t have to seek credit. It will come to you automatically. Lenders will be willing to give you pre-approved loans at decent rates. A line of credit will always be available to you. This can give a sense of security and empowerment even if you do not need to use it.
Better Tenures on Loans
You need to have a very good credit score if you want the lender to offer you a longer tenure on your loan. If you have a credit score close to 900, lenders would not worry about your repayment capacity and would be willing to offer you a longer tenure on your personal loan. This would keep your EMIs low and would be convenient for any borrower.
Faster Approval on Credit Applications
A credit card institution takes time to process credit card applications. Several factors are taken into consideration before approving a credit card. This includes the risk profile of the customer, his repayment capacity, his credit history, etc. A good credit score gives the lender sufficient information to approve the credit card application faster. Over 95% of personal loan applications with a high CIBIL score over 750 get approved automatically.
Better Negotiation Capacity
Armed with a better CIBIL score, you are better off when you need to negotiate loans or any other financial transactions. You will be able to get better interest rates, longer repayment periods, and better offers. A lender would always offer better credit terms to customers with higher credit scores. Lenders would prefer to offer you better terms than to run after customers with the risk of default.
Discounts on Loan Processing Charges
All lenders charge loan processing charges @ 2% approximately on the loan amount when borrowers apply for credit. As a borrower with a high credit score, you can expect a waiver or discount on these charges. Lenders would be happy to offer a discount to high credit worth customers.
Higher Limits on Credit Cards
The credit card limit is usually fixed after taking into account multiple factors like job, the reputation of the employer, salary, growth prospects, credit history, etc. If you have a great credit history that translates into an excellent credit score, you can expect to be offered a higher limit on credit cards.
Every borrower should make an effort to maintain a good credit score by utilizing less than 30% of the credit limit available, repaying debts on time, not entering into multiple debts at the same time, etc. This will give them a good credit history to fall back on when faced with unforeseen circumstances.
A good CIBIL score arms you with the confidence of a different kind as you are not worried about having a line of credit whenever you need it. It is not necessary to use all the credit that is available to you but it is important to maintain a high level of creditworthiness so that you have access to easy credit whenever the need arises. It gives you a sense of financial stability that can be priceless in a crisis situation.
Displaying good credit behavior is always good in the long term as it keeps you safe from defaults and over-exposure to credit. It helps to instill a sense of financial discipline and reward you with a sufficient line of credit whenever the situation demands it.
There are sufficient benefits of maintaining a good CIBIL score and no advantage of messing it up. Live a financially disciplined life, maintain a good CIBIL score and eliminate the stress of insufficient access to credit when life throws a curveball at you.