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How can a personal loan with low CIBIL score help in building the credit health

  Friday, November 04, 2016     written by : CSF-Team
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Varun Kapoor, a young software professional worked hard to save up for the down payment of his dream car. He had a stable job and the capability to make timely repayments of EMIs of a car loan. After a thorough research he applied for an SBI car loan that offered an attractive rate of interest. He was confident of getting an approval as he had provided all the supporting documents and proof of income that was substantial enough to cover the EMIs. But to his surprise his loan application was turned down and the reason stated by the bank was that he had a low CIBIL score.

Varun then applied to 3 more banks but his application got turned down for the same reason. Varun never knew that the CIBIL score played such an important role in loan approvals. He never gave it a serious thought and never bothered to check his CIBIL score himself. He could not comprehend why he had a low score even though he paid off the minimum balances on the credit card each month. He was determined to bounce back and improve his CIBIL score. But right now he badly needed a car to commute to office daily and wanted someone to finance his car.

And then Varun got to know about the personal loan for low CIBIL score. These loans specifically cater to people with a low credit score. Varun reluctantly applied since he had lost all hope of seeing his loan getting approved. By now Varun had realized that his credit card usage habit was a major factor that was bringing his score down. He had more than 5 credit cards and he had maxed out the limits every month. Also, the type of loans on his credit report only included credit cards which are unsecured loans. Both these factors were bringing his credit score down apart from the failure to pay up on or before the due date consistently.

However, his loan got approved since the lender looked at aspects that go beyond this numerical figure of the CIBIL score. It offered to lend money to Varun because it had confidence in Varun’s repaying capability. He had a stable job and an income that was enough to service the EMIs. His low score was more because of ignorance and carelessness than a wilful default. Varun was oblivious to the fact that carrying huge balances can hurt his credit score and loan taking ability in the long run.

This loan not only helped him buy his dream car but also facilitated improve his credit history.

1. Varun took a loan of Rs 5 lakhs out of which he used Rs 3.5 lakh to finance his car. The rest 1.5 lakh was used to clear off the credit card debt. This brought down the credit utilization ratio to a great extent. Reducing the outstanding balances as compared to the total credit limit helped improve his score. The interest rate charged on loan was much lower than what Varun was paying on the outstanding credit card balances. This helped him save money and get out of debt faster.

2. Secondly the new loan helped in improving the Credit mix. An instalment loan is much more favourable for a credit score than a revolving line of credit.

3. Payment history accounts for 35% of the credit score. It is the most important factor that builds one’s credit history. Regular on time payment of the loan instalment helped Varun in improving his payment track record.

Varun did not get into too much debt with the credit card again. He maintained the discipline of not using more than what he could repay conveniently and make a full payment of the balance each month. After an year of regular payments of the EMI on the new loan when Varun checked his score it had increased from 600 points to 760 points.

The bad credit personal loan thus was a blessing in disguise. Varun could purchase his own car when no leading banks were ready to finance it. It saved him from the hassles of commuting to office daily. Moreover it helped him re-establish his credit worthiness and get his financial health back on track. It added positive activity on his credit history by improving the credit mix and the payment patterns.