How a good credit score can help you in tough times

Last Updated 15 September 2023, 05:42 IST

Most lenders check an applicant’s CIBIL score to determine their eligibility for loans. A good score enhances a loan applicant’s eligibility and adds to their bargaining power too.

In the fast-paced and unpredictable world that we live in, you never know when you may find yourself in urgent need of money. Take the COVID-19 pandemic for example. Because of a virus that came out of nowhere, millions of people lost their jobs, businesses, or faced significant cash-flow issues, thereby finding themselves in a financial lurch. Just in the month of April 2021, almost 7.35 million people lost their jobs due to the second COVID wave. The actual impact of the virus on people’s livelihood over the last 18 months is certainly worse.

It is not just the pandemic or a job loss that may leave someone in financial lurch. Life is full of uncertainties and there could be other situations when you are in urgent need of money. It could be in tough times like a medical emergency that you need financial assistance, or there can also be happy occasions where you need financial support for a short time. A loan could be the answer in both situations as it provides a financial cushion for you to manage the needs. However, these days, any sort of credit facility is contingent on your credit score - popularly known as CIBIL score. Whether you are applying for a home loan or vehicle loan, or any other kind of personal loan, or even a credit card, a bank or any other financial institution will first check and verify your credit score.

This score is a common denominator in which the financial credibility of an individual is summarised in the form of a number, which represents that person’s credit health or creditworthiness. Higher the CIBIL score, higher the credibility, and vice versa. With a credit score ranging between 300 and 900, almost 90 percent of loans are sanctioned to people with a credit score that is higher than 750.

Credit score represents creditworthiness

Credit scores are calculated and maintained by four credit bureaus in India. They have been authorised to do so by the Reserve Bank of India. An individual with a good credit score is regarded as a responsible borrower, that is someone who manages their financial obligations well and has the ability to pay back the borrowed amount in due time. As the number represents the creditworthiness, a higher credit score may allow you to apply for a higher loan amount. A higher score not only means getting the best deals from lenders, it also provides good bargaining power to a potential borrower as they can negotiate better loan terms including tenure and EMI-related flexibility, down-payment to be paid as well as interest rate.

Arriving at credit score

The credit score is calculated based on a number of factors including the number of loan accounts you have, total amount of outstanding debt, type of credit facilities availed, repayment track record, etc. Based on these parameters, credit bureaus like CIBIL generate your credit score. Using this score as a key parameter, lenders evaluate your loan application.

Repay in time for a good score

For a good CIBIL score, it is of utmost importance that the loan repayments, including interest, are done on time, that too on a regular basis. Delays and defaults in repayment of a loan, including credit card dues, are reported to credit bureaus by the lending institutions and have an adverse impact on your credit score. Conversely, timely payments strengthen your credit score. Moreover, having a low credit utilisation vis-a-vis the sanctioned credit limit – especially on credit cards – also helps to improve the credit score.

In case you make multiple loan applications during a short span of time, it may have a negative impact on your credit score as it indicates the likelihood of an increase in your debt exposure in the near future.

Checking your credit score

While the authorised credit bureaus and banks offer the facility to check the credit score for a nominal charge, you can get a free credit report at Finserv MARKETS. The Financial Health Check Report (FHCR) by Finserv MARKETS, provides you with an overview of more than just your credit score. It provides you in-depth guidance to not only understand your credit score but also empowers you with simple steps and knowledge to improve your financial health. Apart from that, the health check report from Finserv MARKETS also includes your performance across various parameters that are taken into account to arrive at your credit score. With knowledge of what you are doing right and where you need to improve, you can work towards improving your credit score.

It is a good practice to check your credit score at least once every six months, so that you can take any corrective measures if required. After all, you never know when a need for a loan could arise, especially in tough times. At the same time, you can also maintain a good credit score by making timely repayments on your loans and credit cards. This will ensure that you are eligible for easily getting a loan on attractive terms whenever you find yourself in need of money.

This article is part of a featured content programme.
(Published 27 August 2021, 10:48 IST)

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