The credit bureaus who record all the information regarding our credit card and loan payment behaviour are exist since past one decade. They calculate your credit score that the lenders use to assess a borrower's worthiness before making a loan approval decision. But not many people were aware of the importance of this number. Lately people have realized that credit scores affect their financial life significantly.
They have realized that they need an excellent score in order to get approved for loans at attractive rate of interest. They now understand how this number is calculated and what steps they should take to ensure a good CIBIL score. However your credit score is not the only thing that affects your eligibility. Having an excellent score is not the key to get easy approvals. There are several other factors that lenders consider; hence you may get turned down even if you have a good CIBIL score. Let's have a look at those factors.
1. You do not have sufficient income- Credit bureaus do not take into account your income level during CIBIL score calculations. But lenders give a significant weightage to your income level and employment while evaluating your creditworthiness. They want to make sure that you have a regular stream of income that is sufficient to cover the monthly EMIs. Many lenders out rightly reject your application if you are currently unemployed as they fear that you may not be able to pay back what you owe. They also have a benchmark of a minimum income level that you require for a specific amount of loan. If your income is below that level, then lenders feel that you do not have the capacity to repay the loan back on time. For example if you apply for a personal loan of Rs 5 lakh for 2 years and your income is Rs 3 lakh per annum, you may not get approved even if you have a high CIBIL score.
2. A high debt to income ratio- Apart from the income level, your current obligations are also taken into account to determine your repayment capacity. The monthly payments that you make to service your existing loans are divided by your income to find out the debt to income ratio. If this ratio is too high, you may be considered as a risky borrower who is already too overleveraged. Ideally lenders prefer a ratio of 30% or less. If you already have too many loans to service, the chances of your missing payments is high. So even with a high CIBIL score you may still be considered a risky borrower.
3. Defaulter's list- Most banks and financial institutions maintain a list of borrowers who have defaulted on their payments. They share this list with the credit bureau. Banks make sure not to lend money to such borrowers again. If you had missed a payment in the past and your name entered this CIBIL report defaulters list, the chances of you getting disapproved for new loans are very high. Sometimes even if other details like your address matches with the record of the defaulter, you may be denied a loan.
4. Major Derogatory Items- Negative information stays on your report for many years even though with time the impact it has on the score decreases. But some lenders still feel wary of lending money to people with remarks of collection items, settlements or bankruptcy.
5. Credit enquiries- Too many credit enquiries in the past few months indicates desperation for credit. Lenders usually avoid such borrowers who display a credit hungry behaviour. So if your debt amount has accelerated suddenly in the past couple of months your new loan application can get rejected. Your CIBIL score is a reflection of your past behaviour while dealing with debt obligations. But before lending money banks also pay attention on your future ability to pay back the loan. Hence apart from the credit score they weigh several other factors listed above. If you fail to meet any of their criteria relating to those factors, you may have to face a rejection. Hence, even though your CIBIL score plays a crucial role in loan approvals, it is not the single most factors that can promise you an approval.