Low CIBIL Score – Check your Credit Utilization

Low CIBIL Score is now synonyms to Loan or Credit Credit Card Rejection. There is a common perception that Low CIBIL Score is only due to default or delay in payment of credit card bill or loan EMI. It is not 100% correct. Low CIBIL Score has very strong co-relation with overall credit eligibility. “Credit Eligibility” means max credit that a person can avail and “Credit Utilization” is actual credit availed. It is important to maintain a fine balance between credit eligibility, credit requirement & credit utilization. Optimum distribution of credit is essential depending on your current requirement. Currently if i don’t need any loan or credit card in near future then it is beneficial for me to increase credit limit of my  credit card. If i utilize max 30% credit limit on m-o-m basis then it will help me to improve my CIBIL Score. Contrary If  i am planning to apply for Home Loan in 6 months time then i should start fine tuning my credit eligibility to free some credit limit and increase overall credit eligibility. It will also help me to improve my CIBIL Score thus increase my Loan eligibility. In short, Lower the current credit utilization, higher the Home Loan eligibility. At the same time, higher current credit utilization will result in Low CIBIL Score.

Credit eligibility can answer why some people with Low CIBIL Score get Home Loan whereas Home Loan of others with CIBIL score of more than 750 is rejected. There is no thumb rule that CIBIL Score of 750 guarantee home loan. Lets understand with an example of my client Mr. Sunder that Why Low CIBIL Score is not a reason to worry if there is no default or delay in payment.

Mr. Sunder applied for Home Loan of 20 lakh and his Home Loan application was rejected. Reason given by bank was Low CIBIL Score. He pressed panic button. He called me and told that he has never defaulted or delayed any payment then how come he has Low CIBIL Score. He shared his CIBIL report with me. When i saw his CIBIL score and compared his credit behavior with his income level, i observed he has utilized most of his credit eligibility. Assuming annual income of Mr. Sunder is 5 lakh then depending on his age and other factors he can avail max credit of 20 lakh to 25 lakh. His low CIBIL Score can be attributed to too many unsecured loans. These loans were education loan, personal loan, being a guarantor of his friend’s Home Loan and a credit card consumed 90% of his eligible Credit limit. Therefore Home Loan of 20 lakh was bound to get REJECTED. Please note that liability of a Guarantor is same as that of a Borrower. If you are a guarantor of 15 lakh Home Loan then a lien of equivalent amount will be put on your overall Credit eligibility. In short, amount will be reduced from what you can avail through credit. After taking some positive steps to free credit limit and once he ceased to be a guarantor of his friends home loan, his Low CIBIL Score improved to 753. Last month his Home Loan was approved and now he is proud owner of flat in Hyderabad.

Low CIBIL Score is not an overnight phenomena but is outcome of credit hungry behavior.  High credit utilization eats into credit eligibility and directly impact CIBIL score of an individual. In my post on 5 Tips to improve CIBIL Score i discussed general tips for readers who want to improve their CIBIL Score or have Low CIBIL Score. Lets discuss how to check credit eligibility in case of low CIBIL score.

How to check Credit Eligibility in case of Low CIBIL Score

Though there is no standard process to check Credit Eligibility in case of Low CIBIL Score. Reason being CIBIL Score calculation is as secretive as the secret recipe / formula of Coca Cola drink :). Still we can find out at macro level what is hurting our CIBIL Score and reason for Low CIBIL Score. I am assuming there is no default or delay in payment from an individual.

As a 1st step CIBIL report should be readily available. In many cases i observed that my clients rely on information shared by Bank Executive. Please note that in most of the cases, banks only pull out CIBIL Score not CIBIL Report to check basic eligibility. Based on score only loan / credit card is approved or rejected. In case of Low CIBIL Score, application is rejected without going into further details. It is important to note that information available with Bank Executive is only limited to your 3 digit CIBIL numerical value i.e. CIBIL Score. But in order to show that they know everything they pass wrong information to customer regarding Low CIBIL Score which is unfortunate.

As a 2nd step, please check all accounts which are OPEN in CIBIL Report and note down corresponding credit limit or principal outstanding. In case of Credit cards, you should account total credit limit of credit card instead of credit limit utilized. Reason being, you can utilize upto 100% of credit card limit therefore it is assumed to be credit utilized or can be utilized by the customer. Sum total of all account will give current Credit Utilization. Assuming current credit utilization is 20 lakh.

Step 3: Now check your current annual income. Only consider net take home salary as reimbursement or bonus is not considered while fixing eligibility of any loan. Assuming net annual take home salary is 10 lakh

Step 4: Multiple net annual take home salary with 4 and it is your credit eligibility i.e. 40 lakh. Now imp point is that this multiplying factor of 4 is different for different people. On an average i observed from my client cases that it is around 4 for most of the people.

Now from above calculation, the Home Loan eligibility of a person is 40 lakh minus 20 Lakh i.e. 20 Lakh. Assuming this person utilized overall 30 lakh credit limit instead of 20 lakh then his Home Loan application will be rejected.

Please note that this article has discussed only one of the factor which influence CIBIL Score. Credit Eligibility has strong co-relation with Low CIBIL Score. CIBIL Score is complex calculation and is dependent on multiple factors. A single factor can only influence to the extent weightage assigned by CIBIL to that particular factor. In this post we are assuming that an individual has never defaulted or delayed any payment. His Low CIBIL Score is only because of Credit eligibility issue.

I hope you liked the post and as i keep saying that there are no shortcuts to success similarly there are no shortcuts to High CIBIL Score. Infact one day my wife jokingly told me that after 10 years at the time of marriage parents will ask potential son-in-law or daughter-in-law “What is your CIBIL Score?“. Parents may not find a match for their child with Low CIBIL Score :)

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