CIBIL Score – Everything You Need To Know About Credit Score

Most lending institutions ask for the borrower’s CIBIL score before lending a business loan as it is cited as an important business loan requirement. However, most small business owners know little about CIBIL score while some know nothing about it.

A CIBIL score is an important requirement to avail a business loan. Also known as a credit score, the CIBIL score is a three-digit number which represents the creditworthiness of the borrower. It lies between 300 and 900 and represents all the financial transactions where the borrower has borrowed or repaid the money.

Why is a CIBIL Score important?

A credit score rating is said to be reflecting the borrower’s creditworthiness. When the borrower’s credit score is high, it shows that the borrower is responsible and have paid all his debts on time. A CIBIL score for loan approval is important as it showcases:

  • How risky or dependable you are as a business loan borrower.
  • If you have paid all your previous loans and debts on time.
  • How responsible are you with finances?

Thus, CIBIL score directly impacts your business loan taking ability. The business loan sanctioned by the lender or even the interest rate will depend on your CIBIL score— if the CIBIL score is low, it represents high risks and thus you will be charged higher interest rates.

The credit score allows the lending institution to judge the borrower’s potential to repay the loan. This is why the CIBIL score is an important business loan eligibility criterion. The minimum CIBIL score for the business loan is 750 and if your score is below it, there are higher chances that your business loan application form will be rejected.

What All CIBIL Score Report Contains?

The following are the details that the CIBIL score report contains:

  • Credit Summary: The CIBIL score contains the credit history of the borrower. The kind of loans and the amount the applicant has taken in past or is currently having. All the information is under different sections, such as credit cards, business loan instalment, etc.
  • Account History: This section in the credit score report contains the details of the borrower’s credit account. It contains all the information, be it the name of the borrower, account number, the date of account opening, the current balance, or even the reason why the borrower borrowed money.
  • Public Records: This section contains all the borrower’s current and previous financial slipups (financial mistakes). This section also includes information about bankruptcies or criminal arrests. It is important that the borrower pays special attention to this section and identifies the causes of these mistakes in order to ensure that no such mistakes are repeated in the future.
  • Credit Enquiries: Credit Enquiry is the section where the number of times third parties have accessed or enquired your credit report in the last 2 years is written. The lending institutions or financial companies have access to only a small section of your report and you can view all the credit enquiries. Noteworthy, these enquiries are the result of the borrower’s loan enquiries. Simply put, the credit enquiry by the lending institution was only made when the borrower had applied for a business loan. So, the number of enquiries made will show the number of times you applied for a loan.

Why do Lending Institutions Check your CIBIL score?

Since the CIBIL score represents the overall creditworthiness of the borrower, the lender checks the score for a variety of reasons:

  • To judge even if the borrower qualifies for a business loan or not
  • To measure the risk and if the borrower is capable of repaying a business loan
  • To decide the business loan amount and the rate of interest applicable
  • To check the borrower’s credit history and records

How to Increase CIBIL the Score?

After knowing what is CIBIL score and its importance, now comes the most important reason – how to increase the CIBIL score? The following are the ways by which you can improve your CIBIL score?

  1. Keep a Check on Your CIBIL Score Report: Keep an eye on the CIBIL score in order to ensure that no wrong information is entered in your report. In case there is any, you can get it corrected. Also, you can take a note of the reasons which are bringing your CIBIL score down and correct them.
  2. Make All Payments on Time: Making all payments on time is the most important point for a good CIBIL score. It is imperative that you make the payment of all the loans on time, at least 5 days before the due date. This would show that you are responsible and you do not wait for the last day to make payments.
  3. Hide Credit Hungry Behaviour: When you apply for multiple loans and credit cards and are always in debts, this shows your credit hungry behaviour. It is suggested that you should not have more than 2 loans at a time. Credit hungry behaviour is said to be the biggest hindrance to improving the CIBIL score.
  4. Do Not Apply for Loans Frequently: The number of times a lender pulls out your CIBIL score depicts the number of times you have applied for a loan. Applying for loans frequently can significantly bring your credit score down. This also shows your credit hungry behaviour. It is suggested to apply for loans in a time interval of at least 3 months.
  5. Maintain Credit Card Utilization Ratio: It is suggested that you do not utilize your credit card up to its entire limit but maintain 30-40 % ratio. Eating the entire limit will again depict our credit hungry behaviour leading to bringing your credit score down.

Now that you know everything about the CIBIL— what it is, why and how it affects your business loan taking capability, and how to improve it, you can work on increasing it and avail business loans at lower interest rates.

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