How to become loan ready and improve your CIBIL score

It is a well-known fact that the younger you are, the better you are placed to get a loan application approved. As years go by your active life reduces and the lenders are less keen to offer you a longer loan tenor or a higher amount. Age is an important factor but so is your credit history and your financial position at the time of loan application. A millennial would be in the early years of his or her life and can be loan ready with relative ease.

There is a possibility that an older person would have existing loans. With a broader time horizon the impact of their financial decisions, too, stand to have a greater impact on their credit and worth. Besides, as they gradually reach towards their retirement, they also have limited time to repay their loans. Being a young person, a millennial however is someone who has just started on his or her financial journey. They have time on their side.

Age and Loan

When a millennial applies for a loan, the lender recognises the fact that the applicant has a longer time to repay the loan. Therefore, they are comfortable with the idea of extending a longer loan tenor to the millennial. With a longer loan tenor, the Equated Monthly Instalment (EMI) reduces and even a millennial who has just started his or her career can afford to pay it regularly. Even the loan amount can be higher in the case of a young applicant. A young and an old person with a similar credit profile would be eligible for different loan amounts. It is likely to be higher in the case of the younger applicant due to the age factor.

However, when you consider the cost of a loan, the lack of credit history can work against the millennial. The younger applicant with a new career would have a lower income and limited credit history. The lenderʼs credit risk assessment could go higher, as a result, leading to loan approval at a higher interest rate. However, with some very simple preparation steps, the young generation can position themselves rather well in the loan market.

Maintain and build a strong credit score

Your credit history is summarised in a report, based on which your credit score is determined. In India, TransUnion CIBIL is a popular agency when it comes to checking someoneʼs credit score. Your credit score would be somewhere between 300 and 900, where the higher is the better. A score of at least 550 is required to ensure that your credit score is above average, while anything below would be poor. Hereʼs how you can improve your CIBIL score,

Set EMIs as per your affordability – While disbursing a loan, your lender is likely to offer you multiple loan tenor options. Longer the tenor higher would be your interest cost, but lower would be your EMI. You must strike a balance between the interest you want to bear and the EMI you are most comfortable with. Going for a shorter loan tenor just to keep the interest cost low can lead to higher EMIs. With high EMIs the probability of a default increases. Therefore, optimise your loan tenor and EMI amount so that you can repay it timely.

Discipline in repayment – Default in loan repayment can not only attract penalty but also bring down your CIBIL score. Similarly, timely payment regularly can do wonders for your credit score. To build a good credit score, make sure you set EMI reminders and pay your credit card bills and loans on or before the due date.

Pay heed to your credit limit – You will have a pre-decided credit limit against your cards. You should always transact within this set limit. Exceeding your credit limit can lower your CIBIL score. If your expenses often borders around your credit limit, you can get in touch with your lender and request an increase in your credit limit.

Review your debt situation – Excessive loan burden can affect your repayment capacity. Maintaining multiple loan accounts at the same time would result in several EMIs coinciding each month. On a particularly bad month, you may fail to repay one or more of your EMIs, leading to a negative effect on the credit score. Ideally, repay a loan completely before applying for a fresh one. This will keep your credit history ticking and your CIBIL score high.

Diversify your credit history – Not having any loan history will keep your credit score low as you wonʼt have any repayment history. Inversely, you can build a more diverse credit track record by availing different types of loans. If you have consistently repaid loans of short tenor and long tenor, and secured and unsecured loans your repayment record would seem more credible, irrespective of the loan type. For a young loan applicant with limited affordability, it could mean maintaining a credit card, repaying a small personal loan, a two-wheeler loan, or a personal car loan etc.

Build credit legacy – Credit card companies offer excellent deals and offers all the time. However, to build a good CIBIL score you should stick to your older credit cards and transact with them whenever possible. Timely payment against your old credit cards becomes a part of your strong and enduring credit history, thus increasing your credibility.

Review your CIBIL score – By regularly reviewing your CIBIL score you can identify and report anomalies in your credit records. Any information not recorded in your credit history, or incorrectly recorded should be reported by submitting a CIBIL Dispute Resolution Form. Incorrect information can reduce your CIBIL score and by reviewing it regularly you can make sure that you are not leaving anything to chance. Apart from building a strong CIBIL score, you should also look at other finer aspects of your loan requirement and preparedness. Based on your budget and financial plan, identify when and how much loan you would need. Accordingly, keep the documents to ensure smooth disbursal of loan to you. Consult your financial planner or CA for expert advice on your debt requirement and plans. Lastly, choose a lender who offers you a competitive rate and is willing to offer you tailor-made loan products in a seamless and convenient manner.

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