What is a CIBIL Score in Education, and How Can It Help in Securing a Higher Education Loan?

What is a CIBIL Score in Education, and How Can It Help in Securing a Higher Education Loan?

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Securing a Higher Education Loan - Varthana

Education is an essential investment in today’s world, yet its costs have been steadily rising. In India, education loans offer an avenue for students to fund their studies. Often, an education loan becomes the first step towards financial independence for students who wish to avoid relying on their parents financially.

Obtaining an education loan for higher study is often considered the most challenging step in a student’s life. This difficulty largely stems from a dearth of understanding and awareness about financial processes.

A crucial aspect to take into account is the credit score, specifically the CIBIL score. Sustaining a healthy CIBIL score holds immense importance for hopeful students since it significantly impacts the approval of loans. According to CIBIL data, 39% of loans were approved for millennials. According to the platform (OneScore), more than 56.8% of millennials actively monitored their credit score in FY22, up from 48% in FY21. In the case of Gen Z consumers regularly checking their credit score, the platform increased by more than 2.5 times, from 7.1% in FY21 to 19.1% in FY22.

These statistics show that financial institutions are now more open to young borrowers, making education funding more accessible for students like you.

But, what exactly is CIBIL? How is the CIBIL score calculated? And how does an education loan affect your CIBIL score? Keep reading this blog to uncover the solutions to CIBIL score impact on education loans.

What is CIBIL?

CIBIL, which stands for Credit Information Bureau India Limited, is an independent private entity affiliated with an American multinational group functioning within India. CIBIL oversees the compilation of information furnished by Indian banks and financial institutions about individuals who have engaged in loan transactions or inquiries. This information is subsequently shared with banks to support their decision-making processes.

What is a CIBIL score?

CIBIL Credit score summarizes your complete credit history into a three-digit number ranging from 300 to 900. This score informs banks and financial institutions about your creditworthiness and ability to repay borrowed money. A higher score indicates a lower risk for lenders, increasing your chances of securing an education loan for higher study.

How is the CIBIL Score Calculated? What Factors Influence a CIBIL Credit Score?

When an individual approaches a bank or any financial institution for an education Loan, they are required to provide their CIR (Credit Information Report) from CIBIL, which represents their personalized credit history. Based on their historical credit repayment behaviour, CIBIL assigns a score ranging from 300 (least favourable) to 900 (most favourable). If someone has never taken an education loan, their CIBIL score may be negative or zero; this shouldn’t necessarily be a matter of concern.

There are primarily four key factors that determine the CIBIL Score:

  • Repayment History: This reflects how consistently an individual has paid their previous EMIs, the punctuality of payments and similar aspects.
  • Type of Loans: This considers the different types of loans, whether secured or unsecured, that the individual has previously availed.
  • Credit Limits: This pertains to how much of the credit limit on credit cards or other credit lines the individual has used.
  • Multiple Loan Applications: This takes into account the frequency of loan applications or borrowings within a short timeframe.

How Does CIBIL Affect Your Education Loan?

Around 90% of education loans are approved immediately to applicants whose score surpasses 750. The higher your score, the greater your likelihood of loan approval and this principle holds for all types of educational loans. A positive credit score offers several advantages, including:

  • Reduced interest rates
  • Expedited approval with minimal documentation
  • Higher loan quantum
  • Increased credit card limit
  • Extended loan tenure

Also Read: What Credit Score Do I Need for a Student Loan?

Hence, it’s evident that, particularly in the context of education loans for higher study, the CIBIL score plays a pivotal role in the loan approval process.
For many students, they might be starting their credit journey, leaving them with no credit history at all. In such cases, while applying for an education loan, lenders examine the credit history of the co-signers, often the parents. If the parents have a less-than-stellar CIBIL score, it could significantly affect the chances of loan approval.

Minimum Requirement of CIBIL Score on Education Loan

Banks generally expect a minimum CIBIL score of at least 685 when considering education loans. Some government banks might be lenient, considering scores slightly below 685 in cases of minor credit card issues. Private banks, however, are stricter, often declining scores below 685. Private banking institutions and Non-Banking banking Companies (NBFCs) are less tolerant when it comes to CIBIL issues.

It’s crucial to remember that applying for an unsecured school loan with a fairly poor CIBIL score will result in a higher interest rate. Banks and NBFCs take up this approach because they want additional revenue to make up for the increased risk they are undertaking. Major CIBIL problems like loan write-offs, settlements, and bounced cheques lead to the automatic rejection of loan applications by banks.

CIBIL Rating Ranges for Education Loan

CIBIL scores range from 300 to 900, with 900 representing excellent creditworthiness. Maintaining a score of 750 or higher is recommended for better loan and credit card approval chances.

CIBIL Rating Range Education Loan Approval Chances
< 600 Low
600 – 649 Difficult
650 – 699 Possible
700 – 749 Good
750 – 900 Very high

What Causes a Low CIBIL Score?

  • Missing loan payments or EMI delays significantly reduce credit scores.
  • Holding excessive unsecured loans (credit cards, personal loans) can harm credit scores.
  • Crossing credit limits and maxing out cards decrease credit scores.
  • Applying for too many credit cards or loans in a short period might also harm your credit score.

Improving a poor CIBIL score

  • Minimize the number of credit cards and loans you acquire. It might give the impression that you are credit greedy and in financial distress. To keep a decent credit score, avoid applying for many loans or credit cards at the same time.
  • Settle all pending balances promptly. 35% of your CIBIL score is based on your payment history. Late payments or defaults on an education loan for higher study or credit card bills can drastically affect your CIBIL score. To maintain a solid payment history, it is essential to pay all of your bills on time.
  • Make it a habit to clear off any credit card dues as soon as you receive your statement, not just the minimum.
  • Ensure no EMI payments are missed; opt for ECS (Electronic Clearing System) for automatic monthly EMI settlement.

How to Secure an Education Loan for Higher Study with a Low CIBIL Score?

While it might seem challenging to avail an education loan with a low CIBIL score, it is not impossible. Here are the five tips to enhance your chances:

  • Timely Bill Payments: A good credit score is built with timely payments of bills related to credit cards, EMIs and other utility bills. A positive record of a credit score will aid in quick loan approval.
  • Display Income Proof: A good income reassures the lender of your repayment ability despite a weak credit score.
  • Opt for NBFCs: Traditional Banks tend to be more rigid in approving education loans. Whereas NBFCs (Non-Banking Financial Companies) are more flexible if the student’s profile is exceptional.
  • Choose Secured Loan: Secured loans prioritize collateral over credit. Even with a poor credit history, an application can be granted a loan that promises collateral.
  • Fix Credit Report Flaws: Your credit report summarizes your credit history, which includes loans, credit cards, and payment records. Having inaccuracies on your credit record will jeopardize your loan approval prospects. Make it a point to review your credit history every six months.

Also Read: A Guide to Boosting Your CIBIL Score and Landing the Perfect Education Loan

Obtaining an education loan in India is not a daunting task. All you need is a well-planned approach and yes, it’s achievable! Improving your CIBIL score is essential for loan approval. To do this, make sure your bills are paid on time, keep track of your credit use, and avoid applying for many loans or credit cards at the same time. Before applying for a loan, examine interest rates, loan amounts, collateral requirements, payback terms, and tax benefits offered by various banks and organizations. By following these steps, you can boost your chances of securing an education loan for higher study, paving the way for you to pursue your dream career at a reputed college. Start your student loan journey today with Varthana.

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