A quick guide to credit scores and how it impacts your loan application

Jul 13, 2020

If you are looking to borrow, you surely have heard of the term credit score. For the uninitiated, a credit score is an indicator of your ability to repay a loan. So, how does a borrower get their credit score? Read on to learn more about credit score in order to ensure your loan process is smooth.

India’s TransUnion CIBIL Limited, a credit information company, gathers and maintains credit card and loan payment records. The records could pertain to either individuals or businesses. These records are submitted to the company by banks and other lenders every month. Every individual gets a CIBIL Score and Report based on the records. Lenders refer to the CIBIL score for evaluation of an individual or business’ loan application.

CIBIL score and its impact on loan approvals:

The CIBIL score is a three-digit number and is indicative of your credit history; it could range anywhere between 300 and 900. If your score is on the higher side of this range, and is closer to 900, your chances of getting that loan approved are higher.

The CIBIL score is the first impression that you as a borrower make on the bank or lender. If your CIBIL score is low, the bank may not even consider your application. If the CIBIL score is high, then the lender will look into the application and, as the next step, consider other details to check your credit-worthiness. The better your CIBIL score is the greater are your chances of the loan being approved. However, any decision to lend is eventually at the discretion of the bank, and may rely on other factors apart from your CIBIL score.

Wondering how you can improve your score? Here are some steps that may help you raise your score and get a loan approval.

Don’t delay your payments: Always ensure that every due payment is done on time as delays reflect poorly on your credit worthiness.
Don’t max out your credit balance: Ensure that you don’t use too much credit, and impose a limit on your credit card usage and borrowings.
Track the nature of your loans: Strike a fine balance between secured and unsecured loans. Having a home and auto loan that are secure alongside your unsecured loans like personal loans or credit cards may show your credit-worthiness in a better light.
Think before you apply for fresh credit: Every time you seek fresh credit, think twice. You don’t want your lenders to think you are constantly reliant on excess credit.
Track any accounts you might have guaranteed, co-signed or held jointly with someone else In all these cases, you will also be held liable for any missed or delayed payments. So, check your accounts frequently as any lapse will reflect on your personal credit-worthiness.
Review your credit history: Keeping a watch on your credit score and report regularly and making course corrections will help you avoid any nasty surprises or loan rejections.

What does it mean when your score is NA or NH?

Looked at your credit score and wondered what NA or NH means? This means you don’t have a credit history, or enough of history to be assigned a score. This could also mean that you don’t have any credit activity in the recent past. You may have only add-on credit cards and that could mean you have no exposure to credit. These are not negative scores but some lenders may not offer loans for applicants with no track record. This is again at the bank or lender’s discretion.

CIBIL Score 2.0:

In recent times, consumer profiles may have undergone a change, thanks to new trends or changes in borrowing preferences. In line with these changes is CIBIL Score 2.0, an updated version. Many banks have made the switch to this upgrade and other lenders are in the process of switching. The upgrade has a new risk index score range for those with a low credit history, of less than six months. So, anyone under the NH or NA categories in the earlier version may find themselves in this range of 1-5, where 1 signifies high risk and 5 signifies low risk.

Remember that lenders may have different loan eligibility criteria depending on the version they are using.

Cibil Score 2.0 summary and interpretation:

Score & Index	Interpretation (i.e., for whom does this score reflect)
NA or NH	Individual has no credit history; hence no information has been reported to us Individual’s Credit Report may only have enquiries i.e. banks have accessed the individual’s credit report but have not sanctioned any loans No credit information has been reported to us for the individual in the last 24 months
1-5	Individual has a credit history of less than 6 months Higher the index, lower the risk
300-900	Individual has a credit history of more than 6 months and the credit history has been reported to us within the last 24 months Higher the score, lower the risk

Score & Index

Interpretation (i.e., for whom does this score reflect)

NA or NH

Individual has no credit history; hence no information has been reported to us
Individual’s Credit Report may only have enquiries i.e. banks have accessed the individual’s credit report but have not sanctioned any loans
No credit information has been reported to us for the individual in the last 24 months

1-5

Individual has a credit history of less than 6 months
Higher the index, lower the risk

300-900

Individual has a credit history of more than 6 months and the credit history has been reported to us within the last 24 months
Higher the score, lower the risk

Conclusion

Having a good credit score is important when you are applying for a loan. Follow some financial discipline by way of timely clearance of dues and keeping track of your loans to ensure a good score. It helps to understand what different scores on your credit report mean, so that you know what to expect when you are applying for a loan.

Click here to check your latest CIBIL Score for free.