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Saturday, 21 December 2019

Why CIBIL or Credit Score Bad For Your Business

         Why CIBIL or Credit Score Bad For Your Business

What is a credit score

 A credit score is a numerical expression by which the creditworthiness of an individual is measured. The meaning of credit score varies for the lender's and borrower's points of view.

Lender's point of View: 

Suppose, A lender wants to lend his money but he needs to find a way who will repay and who will not. Unfortunately, there is no way of telling for sure. Let he has two borrowers, Ram and Shyam. Both of them want to borrow the money from the lender, Lender then asks for showing his credit score. Suppose, If Ram's credit score is poor and Shyam credit's score is of then lender asked them to show their credit score good, then he will lend his money to the Shyam, because of easy returns of the money(principle+interest) from the Shyam. In this way, the lender has built statical modeling that is used for credit scoring.

 For Lender, Building a credit model involves taking a large number of customers who he lent to in the past and separating them into two groups: the ones that repaid their loans and the ones that didn't. Then, the lender looks for common characteristics between people within those groups. for instance, the lender finds that people who defaulted on their loans had a much higher credit card utilization rate before they have taken out a loan from him. Hence, the lender put credit card utilization into his model. Once he identifies 10 or so of the most predictive characteristics he put them all into one model.
One thing to understand about a credit model is that it doesn't give the lender a concrete answer who will repay and who won't. What it does give lenders is a probability of someone defaulting on their loan. That probability is then mapped onto a score for ease of use in credit decisions.
Applicants with higher Credit or CIBIL scores have a lower probability of default, hence the lenders are more comfortable with lending money to them.

for instance, if a thousand people apply for a loan and each of them has a 5% probability of default, then the lender knows that they can expect 50 people out of that 1,000 not to repay. The lender doesn't know which exact people will default, however they can still estimate their losses by knowing that approximately 50 people will default on their loans.

Hence, the lender needs to do is to work out what interest rate to charge everyone to ensure that the profit made from the ones that did repay their loans is more than enough to cover the losses of the defaulted ones.

Borrower point of View:

The credit score is important for the borrower's point of view. Suppose you want to borrow money or we can say a personal loan then you will go to the lender or bank. They ask you the number of questions like why you want to borrow the money, your income, your assets and many more and then they check your credit bureau file to find out your credit score.

Assume your score coincides with a 10% probability of default. The bank or lender may tell you that unfortunately, they cannot lend you money because your score is too low. The reason is that their risk appetite is not high enough to want to lend money to someone who has such a high probability of default.

The borrower then goes to another, smaller lender or bank. They determine your situation, look at your credit score and tell you that they are happy to lend you money as long as you are willing to pay 18% interest on your loan. You agree, sign the papers and get the money transferred to your account.

What is the difference between Credit Score and CIBIL:

Credit Score is the three-digit numerical expression that justified any personability of borrowing money or loan. Credit scores are offered by many companies. CIBIL is one of them. CIBIL(Credit Information Bureau (India) Limited) offers Credit scores for individuals, (If you remember we call water heaters as geysers however geyser is a brand, due to its popularity water heaters are called in such away. In the same way, the popularity of the CIBIL report among the lenders gave them the name.
For individual credit scores, some popular companies in India are Experian, Equifax, high mark and CIBIL.
For businesses, we have CRISIL, ICRA, CARE, SMERA.

Why CIBIL score or Credit score Drops/Factors which affect CIBIL Score:

.Defaults on Loan Repayment: 

Credit score or CIBIL score drops due to defaults on repayments. These are due to Genuine Finacial Hardship: sometimes we are facing financial hardship and missed our repayments of loan or credit cards, sometimes we unknowingly missed our credit cards payments, we think we will pay this amount with extra charges or interest rates but we are unaware that this also affects our CIBIL score or Credit score, disputes with lender on account of Fraud, extra charges and annual fee charge: Sometimes, we are facing frauds on repayment or any type of misleading such as extra charges and annual fee charge. We are busy fixing these issues and do not pay our debt, this also affects our CIBIL score. For instance, any default on your repayment for 2-3 months will decrease your credit score from 800 to 650.

.High amount of unsecured debt:

If you are taking a high amount of unsecured debt such as more Credit cards and personal loans, more than your credit limit than it will also affect your credit score.Because as per the FICO model, credit mitigation has a weight of 25% in making a credit score. This will affect your credit score.
.Leverage: This term corresponds to your percentage of your spending limit of total credit(credit card or loan).for instance, your credit limit is 50000 and you spend 45000 than this will create a negative impact on your credit score or CIBIL score.

.Impact of Joint/ Add on Cards/ Guarantor:

Credit score impact on joint accounts, for instance, both Husband and wife have a joint account and one of them are paying the bills or credit payment and others are not. Then this will also decrease the credit score.
Add on cards mean adding a new card on currently using the card. For instance, your father is using a credit card and he added a card for you. But if you spend over the limit or in case unable to pay the spending limit then this will affect both credit scores.
.Guarantor: Nowadays, Becoming a Guarantor is like Cutting your own throat.Because, in the future, if that person unable to repay than the bank asked you to repay and this will affect your credit score.
.Suppose in your company, if you are Guarantor, Proprietor, Director than your credit score also impacts.

.Inaccurate Information Credit Report:

Inaccurate information such as incorrect open accounts, partial or full payment of loans, settled loan 
These things also affect the CIBIL score or Credit score.

Tips to Improve the CIBIL score:

.Pay all full amount of Credit Cards/Loans on time:

.If you have missed any EMI or Credit Card payment for 1-3 months due to financial crisis or unknowingly then try to pay off all your dues as soon as your situation will improve or better.
.Try to adopt Automatic Payment Modes such as ECS(Electronic clearing service) or PDCs(Post- Dated Cheque).once you adopted any of these services, there is less chance of missing repayment of dues.

.In case of any disputes with the lender for Frudluent transactions, extra charges, annual fee, etc, Try to settle down it as soon as possible and pay the agreed settlement amount. for instance, there is a fraud of 50000 rs and the lender offered you to pay 25000 rs, then pay it and settled down the issue. Because if you take it too long then it will affect your CIBIL score.

.Credit Mix and Durations:

Limit your Unsecured Credit (credit cards and personal loans) to less than 20% of your total credit. for instance, Suppose your salary is 50000 Rs then banks allow you to spend  25000 monthly on EMI's or Credit card payments. This 25000 Rs is your monthly Credit limit and if you multiplied it by 100 then 25 lakhs will be your Total Credit limit. Now you can maximum spend less than 20% of your Total Credit limit. Means to say, You can spend less than 6000 Rs monthly on your Unsecured Credit.

.Donot take too many loans in short times. This means to say, you can apply for 3 loans after 18-24 months.

.Donot be Credit Hungry:

.Try to limit your credit card spending to less than 30% of your credit limit or monthly salary.
.Limit your EMI's to less than 40% of your monthly salary.
.Manage Your Credit Cards Well:
.Donot take too many Credit Cards.

.Pay your monthly dues in full. Try to avoid minimum due payments. Because you have to pay a huge amount of interest and this interest rate will accumulate for a long time and will become a burden in the future. Ultimately, It will affect your credit score.

.In case of Financial hardship, pay at least minimum due.

.Keep your oldest credit card with good payment history, whether you are not using it, but keep it will help you to improve credit score or CIBIL score.

.Alternative Loans/Credit cards to Rebuild Credit history:

Many people do not know that they can take alternative loans to improve credit score or CIBIL score. You can take a loan against securities for eg, FD, LIC policy, Gold loan, Mutual Funds, and shares, etc.
.You can take a Credit Card against security(FD).
In both cases, your current credit score does not check while issuing you a new credit card and loan. By making the payment on times in these two cases you can rebuild your credit score or CIBIL score.

. Monitor your loan accounts in case:

.you have a joint loan
.You are a Guarantor of a loan
.Your company has taken a loan where you are partner/Director/Proprietor/Guarantor

Report inaccuracies to CIBIL once in a year :

.Check your Credit Report at least once a year
.Check for your inaccurate open account, if any then try to close as soon as possible.
.Check for discrepancies to CIBIL Consumer Dispute Resolution Online. To visit click on the link

.Before for dispute on CIBIL Consumer Dispute, inform any discrepancies to Lender because they only update the credit data once the lender confirms.

How to check credit score for Free:

You can easily check your CIBIL score for free by clicking the link
Steps to check CIBIL score for free
1. Write CIBIL score check in google
2. Click on the first link


3. Click on get your's now


4. Now fill your details and click on entre to proceed further


5. After proceeding previously, you will get a notification that you have successfully enrolled.
    Enter on go to Dashboard


6. You will get your CIBIL score. The value of CIBIL scores varies from person to person.


Can We take Loan with Low or Bad CIBIL(Credit) Score:

Many banks offer loans to a good CIBIL score holder easily and refused to give loans to bad CIBIL score, but do you know you can also get a loan with low or bad credit or CIBIL score.

Firstly, I would like to share a different level of Credit or CIBIL score


.CIBIL Score of more than 800: 

This is considered to be a good score, borrowers with this CIBIL Score can easily avail of a loan with a low-interest rate. For eg, if you have applied fo house loan and interest rate in the market is 8.9%, but with good credit or CIBIL score, you can avail the loan with less than 8.9%. 

.CIBIL score between 750-799:

Most of the banks and NFCs will give you a loan on this CIBIL score but they will charge interest 0.2-1% more.

.CIBIL score between 700-750:

Some banks and NFCs will offer a loan but they will charge a high-interest rate 0.5-2%.

.CIBIL score<700:

Most of the banks will not offer you loans.

.Low CIBIL Score or NO Credit History:

1. Take Loans in Spouse's name or Joint Loan

In this case, you can easily access the loan because your partner's Credit score or CIBIL score would be good or you can also apply for bigger loans at best interest rates.

2. Add Guarantor:

In this case, if you have a bad credit score or no credit history. for instance, you don't have any credit card in past or you are just a student and you want to take an education loan for higher studies then, in this case, you can apply for loans on the behalf of Guarantor(Family members). Choose only those who have a good credit score or CIBIL score.

3.Alternative Lending Institutions:

In case you have a bad credit history or low CIBIL score, you can also approach cooperative or Rural Banks, Smaller HFCs(Housing Finance Companies) or NFCs(Near Field Communication) or Micro Finance Companies. They don't check the CIBIL score. They ask for Guarantor who has any type of account in their company. One disadvantage of this method is you have to pay high-interest rates. For instance, in the normal house loans, you are paying 8.5% interest but here you have to pay 11-12% interest rate.

4.Loan against Security: 

In case you have a low Credit score and you are not getting a loan anywhere than you can also apply for a loan against Security(FD, Gold, Shares, LIC insurance, Mutual funds, Credit cards). You can also take the overdraft facility on the Salary/Saving/Current account. The interest rate can be higher than a normal housing loan but it would be less than as compared to a personal loan.

5.Friends and family:

You can also take a loan by signing a proper agreement such as what would be the interest rate, time of repayment, mode of repayment, etc. You can also pay Zero interest rates Afterall, you are taking a loan from your family or friends.

6.Corporate Loan Tie-Ups for Salaried Class:

Many corporate banks have tied-ups with Companies and they offer to loan to the salaried class. The borrower has to submit a letter from HR to the bank for applying for this loan. The amount would be less as compare to other loans. But this can be helpful for you to repaying other loans or bill payments.

7.Private Lenders: 

You can also take a loan from private lenders in case you have a bad credit score. This type of lender is popular mainly in Semi-Urban or Rural areas. They asked for Mortgage(property or gold) to give you a loan. The main disadvantage is a huge amount of interest rate (24-36%) annually and a short period.

8.Peer to Peer (P2P) Lending:

This is a new concept of lending. This is an organized way of private lending. In this case, a borrower can avail of a loan with low CIBIL scores or No Credit history. These organizations are not regulated by RBI.So late payments would not affect your credit score. The loan tenure is for 6 months - 30 months. The interest rate is higher than the normal house loan (15-20%).


We have discussed various terms of CIBIL or Credit Score. Like, Why CIBIL Score drops, How to improve CIBIL Score, Various Factors which affect CIBIL Score or Credit Score, Different perimeters of CIBIL Scores, and many more. So as per my points of view, CIBIL Score is important for a Business perspective because if you have a good CIBIL Score and in the future, you want to expand your business then you can easily apply for a loan and most probably can avail the loan.

If anyone wants to apply for the SBI Credit card. Contact following.

SBI Credit card


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