In today’s economy, spending rather than saving is the new mantra people follow. Lavish lifestyles, having the latest gadgets and long holidays often dent one’s finances making, saving money a impossibility for any contingencies. People may however, sometimes require extra funds for unexpected expenses, medical emergencies, going on a holiday with one’s family, doing a down payment for a new house or even renovating an existing house.
At such times, taking a temporary loan seems to be attractive option, but unfortunately not everyone is able to exercise this option. The primary reason for this is the lack of a credit history or a bad credit history of the individual. The same also unfortunately applies to small businesses which may need funds for further business expansion or to purchase more goods.
Importance of credit worthiness
The sign of a growing economy is the credit worthiness of its individuals since easy access to credit is a necessity nowadays. Knowing one’s credit potential is important to plan ones finances and being prepared for every situation. A good credit history plays an important role, as it facilitates easy access to funds on credit at attractive terms.
The need for maintaining one’s credit history came from the past experiences of banks and financial institutions which often faced bad debts. This was due to repeatedly defaulting borrowers, borrowing funds from multiple banks, without any of them being aware of the bad credit history of the individual or business. To stem this problem, credit bureaus like CIBIL were setup, which maintain the credit history of borrowers and share them with its members from the financial community.
The role of CIBIL
CIBIL basically, assigns scores to individuals in a range from 300 to 900, based on their borrowing, payment patterns and other factors. The better the payment pattern, the higher the credit score. A score above 750 is considered best and individuals with this score applying for loans get faster loans at the best interest rates. Similarly, a score below 650 is not considered good and individuals with this score may find it tough to get loans and even if they get the same, the interest rates would be quiet high.
Some of the factors that can affect your credit score are delayed EMI payments, cheque bouncing cases, delay in repayment of credit card bills, having many unsecured loans such as personal loans. Even making multiple applications for a unsecured loan can sometimes affect your credit score. Another factor that could affect your credit score is when someone defaults on a loan, where you are standing as a guarantor.
Banks and financial institutions rely on this CIBIL score to assess the risk of the borrower and make their lending decisions. The amount to be loaned and the interest rates to be charged are also based on the individuals CIBIL scores. Through their access to CIBIL scores, deployment of technology and data analytics, banks and financial institutions are also able to reach larger geographies and respond faster to customer applications for loans and approve or reject the same.
Improving one’s CIBIL score
There may be sometimes circumstances, when an individual is not able to meet his loan payment commitments leading to a low CIBIL score. In such cases, the borrower is not able to access any funds through loans, no matter how genuine his need or situation may be. Borrowers should work towards keeping their loan record clean, in anticipation of such situations.
One of the best ways to do this would be to consolidate all the small loans into one loan. This would reduce the number of negative loans showing on ones CIBIL record and also make the payments of one’s EMIs easier, by reducing multiple EMIs to one. Renegotiating the terms of one’s loans with the lenders and reducing the EMI amount, while extending the payment tenure could be another option borrowers could attempt, to make repayments easier.
It is also important to take a “No Dues Certificate” from the lender, once the loan is closed and check if the same has been updates in your CIBIL records. This way any discrepancies can be pointed out to CIBIL and your credit score properly aligned with the same.
Credit bureaus and credit scores are here to stay, so every individual and business should attempt to maintain a positive score for the same. This would be the right step towards be credit worthy and being able to access funds either for any emergency or business expansion.