Why High CIBIL Score Does Not Guarantee Loan or Credit Card

High CIBIL Score does not guarantee loan or credit facility. I keep highlighting this point in my posts on CIBIL Score. Recently, one of the blog readers wrote to me that his home loan is rejected despite a CIBIL Score of 800. I do understand the pain and agony. At the same time, it is important for potential borrowers to understand the importance of credit behavior. Unfortunately, it is getting more difficult to avail credit or loan facility with each passing day.

Business of High CIBIL Score and Marketing Strategy

There are a lot of 3rd party credit agencies in the market promising a High CIBIL Score. By following certain tactics, a borderline credit score case can be pushed above 750. One of the biggest MYTH that is marketed is that High CIBIL Score of more than 750 guarantees a Loan or Credit facility. It is not TRUE.

A credit score is a very complex topic to understand. It is a mix of more than 70 factors. It is not possible for credit agencies to explain this subject to all the borrowers. In 99% cases, they also don’t understand :). Therefore, the best way to market the credit concept to the potential borrower is to SELL the CIBIL Score. Borrowers can correlate with a credit score as from school days we are over obsessed for marks/score. It is deep rooted in our psychology that score of 80% is good and 60% is bad.

On similar lines, in order to flourish the business of credit score, the credit agencies have fine tuned the mind of a borrower that score of more than 750 is Good or is High CIBIL Score. In other words, CIBIL Score of more than 750 is similar to the distinction in our school exams. In this mad race, borrower fails to pay the attention to the credit behavior. In my opinion, in future credit behavior will gain more and more relevance compared to high CIBIL score.

Understanding Credit Behavior and High CIBIL Score

Let me clarify that credit score is the derivative of various factors that reflects the Credit Behavior of the borrower. From last so many days i was wondering how can i explain the concept of Credit Behavior and High CIBIL Score to blog readers. Finally, i decided to explain with school marks only.

Assuming i have 5 subjects in a class. Each subject carries 100 Marks. Now as a thumb rule, a score of 400 i.e. 80% is good to get admission in the college of my choice. In this case, if i score 90 marks each in 4 subjects and 40 in 5th Subject then my total score will be 400. I will get the admission in the college of my choice despite very bad performance in one of the subject. As i was not good in Chemistry during school days, therefore, assume the 5th subject is Chemistry :).

Let say to maintain the quality of students admitted, the college decides that besides a cumulative score of 400, it is compulsory to score min 70 marks in each subject. Therefore, even if my score is 400 i will not get admission as my score in chemistry is 40. In other words, despite high score, i will fail to get admission.

This is the simplest way i can explain the concept of High CIBIL Score and Credit Behavior :). Now let’s assume and correlate that individual subjects are factors that influence Credit Behavior. The CIBIL Score is the cumulative score. Therefore, you might have High CIBIL Score but your score on one of the imp credit behavior factor (read: Subject) might be very low. Some of the factors that i already covered in my blog are Credit Utilization, Type of Loan, Credit Limit, Days Past Due etc.

Let’s take the example of high credit utilization that impacts the credit behavior negatively.  High credit utilization does not imply that my credit score will be less than 750. Assuming my credit score is 820 and my credit utilization is high. In this case, my CIBIL Score may drop to 780 but it is still more than a psychological barrier of 750. Therefore, from the perspective of the borrower, the approval of loan is just a formality. On the other hand, from the financial institution perspective, the loan/credit approval is high unlikely. A borrower might not be able to understand the reason for rejection. He/She will complain that despite High CIBIL Score the loan is rejected.

Therefore, as a borrower besides high CIBIL Score, you also need to maintain high score on individual parameters.

Bank NPA’s and Loan/Credit Approval Process

Another key reason for more no of rejections in recent past is an increase in bank NPA’s. The easy money has vanished from the market. There is a huge pressure on banks to control the NPA’s. The banks are adopting a strategy that “In the case of doubt REJECT the loan or credit facility“. It is reflected in no of credit cards in India. According to recent data, in 2015-16 the no of credit cards in India were 24.5 Mn. Whereas in 2007-08, the no of credit cards were 27.5 Mn. In other words, with the increase in Bank NPA’s the Loan/Credit Approval process has become more and more stringent. The growth is superseded by the quality.

High CIBIL Score of more than 750 guarantees a Loan or Credit facility was TRUE some years back but today it is an MYTH. The banks are focusing more on credit behavior rather Credit Score. On the contrary in some cases, i observed that borrowers with low credit score didn’t face any problem in credit/loan approval. The reason being, the borrower followed good credit practices in past but may be due to any unsecured loan, the CIBIL Score is less than 750.

What to do If Loan/Credit is Rejected Despite High CIBIL Score?

I am a firm believer that if one door is closed then some other is opened :). Therefore, if your Loan/Credit request is rejected then you need not worry. Always remember that one thing that is working in your favor is High CIBIL Score. Each bank or financial institution has its own risk assessment process. The loan rejection might be the result of risk assessment by a specific bank.

A non-creditworthy borrower of a Bank A might be a high creditworthy borrower for Bank B. As a first step, you should check with the bank/financial institution the reasons for rejection. The probability is very low that bank will inform you the reason for rejection. Still, you can give it a try. Even you find out the reason then try to rectify. Alternatively, i am sharing next steps for Credit Card and Home Loan.

(a) Credit Card:

You should approach the relatively new private banks for a credit card. They are not stringent in their approach. In all probability, they are in a dire need to meet their monthly credit card targets.

You can also target the banks who are running high decibel promotions for existing customers. Not many people are aware that these promotions are also acquisition tool. For example, one of the banks is running a promotion of Buy 1 Get 1 Free Movie ticket on one of the portal. Though i hold a credit card of some other bank but this promotion made me think why not avail credit card from this bank :). Another bank is planning an IPO shortly and they are currently running aggressive promotions on e-commerce portals. Based on high CIBIL score you can easily get a credit card from such banks.

(b) Home Loan:

PSU banks and some of the leading private sector players are quite stringent in Home Loan approval. A potential borrower can approach the HFC’s or NBFC’s for Home Loan. As i shared in my previous posts that these institutions are quite relaxed in the approval process. The reason being, healthy balance sheet and NPA’s are under control. They might approve Home Loan only on the basis of High CIBIL Score i.e. without studying the credit behavior.

Another option is cooperative banks or relatively new private banks as i shared in credit card section. The only disadvantage is that you might need to pay higher interest rate compared to Home Loan interest rate of market leaders like SBI, ICICI Bank or HDFC Ltd.

Words of Wisdom:

To summarize, High CIBIL Score is a big plus point for potential borrowers. Due to reasons highlighted by me in this post, you may face some teething issues. It is always advisable to follow good credit practices. The good credit practices are reflected as good credit behavior in your CIBIL report. Always remember that High CIBIL Score along with good credit behavior is a must for HIGH Creditworthiness.

The banking experts are predicting more pain for the banking sector in coming years. It implies that approval process will become more strict and borrowers may find it more difficult to avail the loan/credit. Therefore, it is critical to act now :).

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