There are so many components that need to be taken care of when you decide to study abroad – right from convincing your parents, studying for your GRE/TOEFL/IELTS, trying to narrow down the right university and program and applying for financial aid. But, of all these, securing the loans required for your education has been infamously labeled by students as the ‘most difficult part’, among other, more intense labels. Why is this?
When it comes to the scores, the LOR, and the SOP – there is no lack of knowledge with the students. The educational system prepares them well to address these areas. Friends, fellow students, enthusiastic parents and the ever increasing number of coaching classes are more than ready to fill in any voids. The student is in his comfort zone and the preparation does not suffer for the lack of resource availability and exposure.
But, when it comes to the financial aspect, the student finds himself wandering in unfamiliar, unchartered territories - due to a lack of knowledge, awareness, and exposure, there is a certain uncertainty that enters the equation. Consequently, in absence of proper guidance, many students tend to make mistakes that lead to the rejection of their loan applications.
In order to make sure that this does not happen to you, you should perform a thorough research beforehand. There are various factors that need to be taken care of before you apply for your loan. One of them, and the focus of this article is your credit score or CIBIL score.
What is CIBIL?
The Credit Information Bureau (India) Ltd, or CIBIL, is the central recorder of credit information and is the premier agency for providing credit reports and scores pertaining to individuals.
Every time you avail a credit card or borrow a loan, your credit and repayment information is submitted by the respective member financial institution to CIBIL on a monthly basis. This collated data of financial data and records from leading banks and other financial institutions is then presented in the form of a credit report known as the Credit Information Report (CIR). Through this report, banks and financial institutions can be made aware of your credit history, which may be spread across various institutions, before approving your loan.
What is CIBIL Credit Score?
The CIBIL Credit score, a summary of your entire credit history in the form of a three digit number, is derived from the information provided in your CIR. It normally ranges from 300 to 900 and is a representation of your credit-worthiness. A higher score indicates that you are a less risky borrower, increasing your chances of availing a loan whereas a lower score decreases that probability.
How is this score calculated?
Based on an individual’s credit report, at least 6 months of historical financial data is sought. The data is fed into an algorithm with 258 different variables; each with a different weighting. These intensive in-house algorithms calculate and then generate the CIBIL score. Diligent repayment and secured loans like home or auto loans work positively while payment defaults and too many credit card or loan applications will have a negative impact on your CIBIL score.
What does this score mean?
According to the official CIBIL website, about 90% applicants with a CIBIL score greater than 700 are approved for loans. A good credit score is one of the most important eligibility criteria on the basis of which a bank sanctions your loan, and applicants with higher scores are deemed lower risk.
A significant portion of the student population does not have a credit history because they might not have taken a loan in the past. In such cases, banks tend to check the CIBIL score of guarantors, generally, parents who will repay the loan if the student is ineligible to pay. You can be denied a loan if your parent has a poor CIBIL score.
Students are generally not aware of this system and in turn, neither maintain decent scores nor check these scores before applying. This has led to the considerable rejection of loan applications. Also, upon rejection, making rectifications in the score can take anywhere from 1 to 4 months - this means a significant amount of time is used up. This can translate to not being able to secure the loan in time, which has grave repercussions.
What can you do to prepare?
All in all, the late realization of a poor CIBIL score will only stand to hamper the process of getting the loan approved in time. In order to avoid this, you need to check your CIBIL score right away. This can be done by visiting the official website, paying a nominal fee and submitting the required documentation.
Note that if your score is 0 or -1, this just means that you do not have a credit history and getting a loan or a credit card will help you establish your credit history over time.
If you have a score >700, you are on the right track and should continue to maintain this. If you see a score lower than 700, check your credit report to see the cause of the low rating. If you believe that all your past payments were timely, and the report is erroneous, you can dispute the report with CIBIL for free. The quoted resolution time is 1 month, but can typically take ~2-3 months – so we urge you to start soon!
GyanDhan is an education financing marketplace with an aim to equalize and expand access to higher education.