( The Case ) Rajendra P. Kapoor or "Raj" was basically a good at heart sort of person. His only philosophy in life was, "you live only once, so enjoy it to the max." He would take unplanned vacations, throw random parties, buy expensive phones and more. He had an array of credit cards as he just loved carrying a wallet-full of them. He always believed in using credit so much so that he had a home loan, a loan against MF holdings and a personal loan apart from his collection of cards. To his credit, he had a fully paid car loan.
He did not take much notice when banks started rejecting his application for new credit cards. Don't get him wrong. He earned well enough to pay off his bills on time. Occasionally he would be late in making payments but mostly he was on time.
With every new credit card came a fresh credit limit which meant a higher purchasing power. That gave him an ecstatic feeling. His friends would call him "card guru" as whenever anyone needed card related advice, they would turn to Raj.
He was jolted back to senses when his application for an education loan for his daughter, Rishika, was rejected. He couldn't understand what went wrong. He had always been paying bills on time. He was handling a mixed debt portfolio over the years. He was desperate now because Rishika's future hinged on it.
Raj's poor CIBIL score was the spoiler. Just like any other loan, when a bank receives an application for a student loan, they check the CIBIL score of the student as well as the parent, usually of the loan. Having a parent guarantee the loan by standing as co-applicant is mandatory in education loans.
When the bank checked Raj's CIBIL score, they found his score was quite poor. They noticed that he had been paying off his debts, but he was clearly over-leveraged. Too many credit card applications led to hard inquiries into his CIBIL report which brought down his score. Too many cards and loans indicate that you depend on credit excessively. This indicates that you are practically sitting on a ticking bomb that would explode any minute.
Supposing, Raj was to lose employment. What would happen to his debts? They would start to grow at a massive rate and then it would become impossible for him to keep up with payments. This will not only affect his old lenders but new lenders as well.
Credit cards and personal loans are one of the costliest forms of debt. The lesser you have them in your portfolio the better it is for your score. Raj ignored the basic science behind a CIBIL score. He just went on to apply for fresh credit senselessly. He assumed that as long as he can pay his debts, his score is well maintained. He therefore never pulled his own report to check.
This is one big notion. Your score does greatly depend on repayments but it is not the sole factor. A ravenous behaviour for credit, displayed through several applications, causes a serious blow to the score. There is no doubt Raj had to face rejection of loan for low cibil score.
Another thing that lenders calculate when examining eligibility, is your debt to income ratio. Although Raj did fairly well but he was certainly over-leveraged and there was no further room for a new credit facility.
A credit check is embedded in the fabric of lending. It is most essential and inescapable. One must never assume that the score is doing just fine because you are repaying your creditors on time. Some of the things that Raj could have done better are:
Rishika had to wait another year before she could pursue her course. She completed a part-time course on interior designing in the meantime, while her dad worked on his CIBIL score.
Finally, with a better credit score, which reflected healthier credit practices, he was able to get his foot in the door. Rishika is now in her final semester of B.E (Comp.)