Tuesday, May 5, 2009


With more and more banks and financial institutions adopting credit rating agency's service to find out the credit worthiness of a borrower, before deciding on his loan application, it has become imperative for all the prospective borrowers to understand the various factors which can make or mar his/her credit score. A high CIBIL score might help you get loan at a lower rate of interest from the best of the lender, while a lower CIBIL score might lead to denial of the loan from all the banks and FIs. So what are the factors that influence the credit scores of an individual.
There are many factors which go into your credit scores, but, the major ones are discussed here.
1. Credit Repayment History - The most important factor which influences ones credit score is his credit repayment history. The credit rating agencies will aggregate your credit repayment history on your loans, credit cards etc from all the banks/ FIs and assign a credit score to you. If you have always been prompt in making your payments on time and in full, your credit scores will be higher. And if you have been irregular with your EMI payments, credit card payments etc then the credit scores will reflect that. Bouncing EMIs ,not paying even minimum balance on credit cards negatively affect one's credit score. And if someone is a defaulter (not paid his EMIs or credit card dues for more than 6 months) then the credit agencies will put his name under defaulters list and the person will be blacklisted among all the member banks and financial institutions. This person will most likely never get any other credit facility ever in his life. So, its critical to honour one's commitment of paying one's dues on time at all times. This will ensure that your credit score is better, which in turn, will get you credit at favourable terms in future.
2.Annual income - Another important factor which influences your credit score is your annual income. A higher annual income will generally lead to a higher credit score. The rationale behind this is simple; a person with higher
income is more likely to pay off his debt than a person with lower income , assuming there is no intention issue.So,it makes sense to disclose true income to the lender while applying for loans or credit cards. Lot of self employed people don't disclose their true income due to fear of IT etc and as such end up having a lower credit score.As far as possible, one should never tell banks /FIs a lower income, as it might adversely affect your credit score.
3.Debt Burden - Income to debt ratio means what percentage of your income goes towards servicing your loan. For example , if monthly outflow of all your loan EMIs and credit card minimum balance put together is Rs 20000 and your monthly income is RSs50000, then your debt burden is 40%. Higher the debt burden , lower would be your credit score as higher debt burden implies a stress on your finances.The debt burden should ideally never cross 50% . More than 50% debt burden will mean that the person is financially stretched and is a likely candidate to default on his loans etc in case of medical emergency or any other unexpected expenses and hence his credit score goes down.
4.Profession - Some professions are viewed positively while some others are not , by rating agencies. For example, Doctors , MBAs, High govt officials etc tend to have better credit ratings while blue collared workers like fitter,machine attendent etc tend to have lower credit score. The reason behind this is that a qualified and educated person is more likely to find gainful employment and is likely to earn more than an uneducated and unskilled person and hence the capacity to repay any debt is generally higher for skilled professionals than others.So next time you are filling the loan application form , please fill complete details of your education,profession etc as it gets entered into the records of the rating agencies and can positively/negatively impact your credit scores.
5.Ownership of house - This too can influence your credit score. A person having self owned house is considered to be of stable profile as chances of him running away after taking the loan is lower as compared to a person staying in a rented accommodation. People staying in company accommodation are considered to be better than the ones staying in rented accommodation but not as good as the ones having self owned house for similar reason.
6. Number of dependents - The number of people dependent on the earning member of the family also determines his credit score. More the number of people financially dependent on the borrower , more would be stress on him financially to meet all his dependents financial needs. His disposable income will also be lesser with more dependents. As such people who have more dependents will more likely have lesser credit score than the ones having lesser dependents. Now the question is what number is more and what is less? Well there is no fixed number as such. This factor will work depending on your income , living standard,city of residence etc. For example, a person having a monthly income of Rs 50000 living in Tier 2 city like Indore can easily support 4 dependents while a person with monthly income of Rs20000 and staying in Mumbai will struggle to support even 2 dependents. But the general theme is that lesser the number of dependents the better it is. So if you have other members in your family who are earning members, then it makes sense to let the bank know about it . This will positively impact your credit scores.
7. Number of loan enquiries- Another very important factor which determines your credit score is the number of times you have applied to a bank for loan or credit card. Every time you apply to a bank for credit card or loan , it gets registered as an enquiry with the bank. If you don't take loan from that bank even then it stays as an enquiry in their records. More enquiries are detrimental to your credit scores as it implies that though you applied for a loan with the bank, your loan was not sanctioned by the bank and this is seen negatively by the rating agencies and thus your credit score goes down. But you might say what if the loan was declined by the applicant himself (due to higher rate of interest or any other factor) and not by the bank? Even then nothing changes and will be perceived by the credit rating agencies as loan declined by the bank only. So, while finding out about loans from all the banks is a good idea, one must not apply at all places. The best thing would be to find out all the details of the loan from the banks website, call centre or by personally visiting the bank branch . And after you are done with your research , you should apply. In fact , there is a legislation which prevents people/banks/financial institutions from running queries for credit scores on your behalf without your written consent as it can negatively impact your credit scores.
So, if you take care of these things ,you can avoid getting into the bad books of credit rating agencies. A good
credit score is no longer desirable , its become a necessity today and as such there is not much of an option before us other than taking care of it.


  1. Hello, I found you on blogcatalog.com I'm following you now.

    But this is really helpful blog. And keep on posting more.

    I hope you will return the favor.

    Well here is my blog.

  2. Hi Steinar

    Thanks for the kind words.. Would surely check out your blog too.