Settling Your Loan Can Lower Your Score? Craziness!
Much is known about how your CIBIL report and score is calculated, but much is also not known and defies sense. What you don’t know can hurt you—sometimes very badly.
Here are three lesser-known facts related to your CIBIL report and score to help you maintain a healthy credit score.
Two enquiries simultaneously is one too many
Before applying for a loan, you must be aware of your CIBIL score. You must also not submit the loan application to multiple lenders at the same time. Instead, have an initial meeting with a representative of different banks to check who’s offering the best deal and then submit the application to that provider only.
Vishal Sharma, a techie working at a leading IT firm, didn’t do so while purchasing a home—and paid a price for his mistake. He simultaneously applied to five banks as he was unaware of his CIBIL credit score and the usual cut-off score for home loan.
Vishal did get the loan (his score was 750, which is good enough score for home loan), but his score dropped by a few extra points because of his decision to send the loan application to multiple banks.
Why did this happen?
Each time you submit a loan application, the lender pulls up your CIBIL report to ascertain your credit worthiness. This inquiry is called hard enquiry. Whenever a hard inquiry is made against you, your credit score drops by 5 points.
Each of the five banks to whom Vishal submitted his loan application made a hard enquiry. As a result his score dropped by 25 points, that is, by 20 extra points. Had he done his homework and submitted the application to the bank with the best offer, his score would’ve dropped by only 5 points.
“NA” or “NH” does not speak badly about your credit worthiness
Ankit, a sales person who traveled frequently, applied with a reputed bank for a credit card, but his application was rejected because “NA” was listed on his credit score column. Without understanding what “NA” meant, Ankit went into panic mode and felt “NA” was something bad and he never applied for a credit card again with other another bank.
This was not a right reaction. NA or NH does not speak badly about your credit worthiness. It only means you have no credit activity in last 24 months or there is no adequate data available to ascertain your credit score.
This happens if you do not have credit exposure, which means you have not taken any loan or do not have a credit card or have add-on cards.
Though some banks may not approve your credit card application if your credit score says NA or NH, some banks accept such an application.
Had Ankit applied to other banks, he would have got a credit card.
A settled loan account affects your credit score negatively
Settling a loan is not a good option, as Priya, a woman entrepreneur who had taken a loan but had fallen way behind on her payments, found out the hard way.
Because of poor financial condition, Priya had fallen way back on her repayment of the loan. The loan recovery department was calling her every other day to warn her about a legal action. Naturally, Priya was worried.
However, one day a bank representative called Priya and made a settlement offer where Priya had to only pay 50% of the amount owed and the bank will close the loan account. Priya happily agreed and went for a loan settlement thinking all her financial woes would finally end.
This, however, didn’t happen. At the time of settling the loan Priya didn’t know this because she wasn’t aware how loan settlement affects credit score.
A loan settlement means a bad debt where bank had to suffer losses. It affects your credit score drastically and you will not get a loan in future as majority of the lender will consider you as high risk for lending.
Therefore, never go for a loan settlement. Cut corners or borrow from relatives or friends but pay back the full amount. Once you’ve done that, remember to ask the bank to provide you with an account closure statement, a proof that the loan has been paid in full and the account has been closed.