Many people simply apply for credit without giving a second thought to how the lender might actually perceive their loan application.
Only recently have people begun to realise how crucial it is to be aware of, and to maintain, their credit history.
If you have a good credit record then the chances of your loan application being approved are much better.
But those of you who may not have the best borrower profile, understanding how lenders look at the inherent risk of lending money will help improve your chances of qualifying for credit. Thus, knowing how your credit data might be interpreted offers a chance to improve your credit worthiness from a lender’s viewpoint.
Deciding points
Following are the aspects that affect a lender’s decision to approve or decline a loan application:
Capacity - What is your ability to repay the loan? Do you have a steady job or alternate source of income?
How many other loan payments do you have, and what impact do these payments have on your monthly income? Is your income sufficient to cover your contractual obligations, as well as those other day-to-day expenses?
Credit Usage - Have you used credit before? Do you pay your bills on time? Do you have a good credit history?
Collateral/Capital - Do you have other assets which could act as a secondary source of repayment, such as rental income or a fixed deposit?
Trawling credit reports
Most lending institutions pull out credit reports of all loan applicants. The information included in your credit report produces a credit score that is reflective of your overall credit standing as a borrower. A credit score ranges from 300 to 900 and is calculated based on information in the “Accounts” and “Enquiry” sections of the report. The closer your score is to 900, the more confidence the credit institution has in your ability to repay the loan.
CIBIL is the institution that compiles these reports, but it does not pass any judgment regarding disbursal of loans. It is solely a provider of information to banks.
Depending on their respective risk appetite, banks have in place their own cut-off credit scores for providing loans.
Understanding the CIBIL credit report helps you identify the right time in your financial life cycle to apply for a loan.
It is important for you to regularly review your credit report in order to determine if the information is correct.
In your credit report, here are a few areas lenders focus on.
Payment History : This appears in the Account(s) section of your CIBIL credit report.
There are two parts to this information: the Days Past Due (DPD), and the month and year of payment. The DPD indicates how many days the payment is late that month. Obviously, anything other than “000” is considered negative.
Up to 36 months of this payment history (with the most recent month displayed first) is provided in this section.
Current Balances : Also appearing in the Account(s) section of your credit report, the current balances on various loans indicate the depth of your debt. The sum of your current balances helps determine your strength to take on additional debt in relation to your current income.
Naturally, lower the current balance, better the chance of your loan getting approved.
New credit facilities : If a loan provider observes that you have recently been sanctioned a number of new credit facilities, it would mean that your monthly outflow in terms of loan repayments is likely to have increased. Hence, it may be viewed negatively.
Number of new enquiries : If you have applied for a number of loans in the recent past, the chances of your loan getting approved are likely to suffer. Simply because such credit behaviour indicates that you are ‘credit hungry’ and are in urgent need of money.
By understanding how banks think, you can not only complete a lending application that will showcase your strengths better but you can also pre-qualify for loans by lenders based on their lending criteria.
This will reduce the number of attempts you make to qualify. Fewer attempts at the doors of various lenders for getting loans reduce the short-term damage to your credit prospects.
Ensuring that your ‘reputation collateral’ is reflected accurately will provide you with access to credit faster and on better terms.