Personal Finance

Why higher CIBIL scores count

Harshala Chandorkar | Updated on September 24, 2011 Published on September 24, 2011

The CIBIL TransUnion Score is the first individual credit score in the country that you as a borrower can access. While it has been used by loan providers for almost three years already, CIBIL, in an attempt to improve transparency with regards to the information used during loan evaluations, now provides the CIBIL TransUnion Score to individuals as well.

What does your CIBIL TransUnion Score mean?

An individual's CIBIL TransUnion Score provides a loan provider with an indication of the “probability of default” of the individual based on their credit history.

What this means in simple English is that the score tells a lender how likely the individual is to pay back a loan (should they choose to sanction your loan) based on the individual's past pattern of credit usage and loan repayment behaviour.

What difference does it make to me?

Well, the obvious answer is that the higher your CIBIL TransUnion Score (i.e. the closer it is to 900) the more likely you are to get your loan application approved.

The reason being, closer the score is to 900, the more confidence the loan provider will have your ability to repay the loan.

While this is what is claimed it is always useful to analyze the underlying data.

So what exactly does the data say?

The best way to analyse the impact the CIBIL TransUnion Score has on an individual's loan application is to observe how lenders have behaved over time.

The table below shows us a comparison of new loans sanctioned by loan providers based on an individual's CIBIL TransUnion Score in 2008 as compared to 2011.

The data tells us that 90 per cent of new loans sanctioned in both 2008 and 2011 were to individuals who had a CIBIL TransUnion Score of 700 or more.

However, it also indicates that over three years, lending institutions showed a change in preference towards people with higher credit scores.

From individuals with a CIBIL TransUnion Score ranging from 750-799 in 2008, those with a credit score of 800 and above obtained the bulk of credit in 2011.

Hence, you will have to maintain greater financial discipline in order to secure credit in the future.

However, it is important to note that loan providers also consider your total income, overall debt burden and fit with their internal credit policy before deciding upon your loan application.

For instance, if your equated monthly instalment (EMI) to income ratio is over the set cut-off percentage your loan application may get rejected despite having a credit score of 847.

Simply put, the CIBIL TransUnion Score is like your marks in a Board exam. Higher marks (credit score) do increase the chances of your being accepted to college (getting a loan approval) but don't guarantee your admission.

A more overall evaluation of your extracurricular activities (income level, overall debt burden) is required before your admission is secured.

Different ‘colleges' will have different cut-offs with regards to the marks (credit score) required to gain admission.

(The author is Senior Vice President-Consumer Relations, CIBIL)

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