Check your Credit Utilization if you have low score!

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 one don’t need any loan or credit card in near future then it is beneficial for him to increase credit limit of my  credit card. If he utilize max 30% credit limit on m-o-m basis then it will help him to improve my CIBIL Score. Contrary If  he is planning to apply for Home Loan in 6 months time then he should start fine tuning his credit eligibility to free some credit limit and increase overall credit eligibility. It will also help him to improve his CIBIL Score, thus increase his 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 that Why Low CIBIL Score is not a reason to worry if there is no default or delay in payment.

Mr. Y 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 credit counselor Z 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 counselor. When Z saw his CIBIL score and compared his credit behavior with his income level, Z observed he has utilized most of his credit eligibility. Assuming annual income of Mr. Y 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.
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Source: Secondary