Borrowing money from family members or close friends is common in India, especially if you want to avoid the paperwork, interest, or worry that come with traditional loans. When they need money for credit card bills, weddings, or emergencies, many people turn to their loved ones instead of banks. However, “Will this affect my CIBIL score?”, a question that often rises and that worries the credit worthiness of an individual. Your CIBIL score plays a crucial role in assessing your creditworthiness for any of your future loans, credit cards including rental agreements. Hence, it requires you to pay attention to assess how much your family loans contribute to it. In this article, you will discover the facts of how family loans impact your CIBIL score and how to enhance your credit history.

What is CIBIL Score?

CIBIL score is a three digit number that indicates your credit worthiness. This credit worthiness is assessed based on your past and current credit behaviour. This number ranges between 300-900.

How is CIBIL Score calculated?

CIBIL score is calculated by TransUnion CIBIL, formerly known as the Credit Information Bureau (India) Limited, based on the data shared by the banks & NBFCs. TransUnion is one of the leading credit bureaus. Higher your CIBIL score (close to 900), means the more trustworthy you appear to the lenders and banks.

Why Does Your CIBIL Score matter?

The reasons behind maintaining a good CIBIL score are:

  • A higher CIBIL score ranging 750+ can improve your chances of getting your personal loans, home loans including your education loans.
  • Borrowers with a better score are often considered to qualify lower interest rates. This helps them to save significantly and gradually over a period of time.
  • Credit Card companies prefer applicants with a stronger credit history and higher CIBIL scores. This fastens your credit card approvals. 
  • Maintaining a better credit score can give you more leverage when you negotiate the loan terms with the banks and the financial institutions.
  • An applicant with a strong credit score is more likely to get approved for loans including the pre-approved credit cards and offers while they have not even applied for.
  • Your credit score also makes you appear as a more reliable person. This lets you enjoy non-financial perks from landlords, utility providers.
  • Your CIBIL score is like your financial health and it speaks to your financial reputation. You must maintain a good score to attract better opportunities. On the other hand, a poor credit score can limit your access to essential financial services and financing.

What is a Family Loan?

A family loan is an informal financial loan borrowed from a relative typically. The lender in this case is usually your parent or sibling or your extended family member. It comes as an alternative solution to escape the tedious process of documentation involved unlike a formal bank loan. It is often built on trust and does not always involve the terms related to interest payments, repayment period.

Key Characteristics of a Family Loan:

  • No involvement of banks or any official lenders
  • Usually interest-free ( or at a lower interest rate)
  • Super flexible repayment term
  • Often not documented. It is based on verbal or mutual agreement.

In short, family loans are common in India, among the students and young earners. They seek financial assistance to meet their expenses. As these loans are convenient and pressure-free, they also lack the benefits unlike formal bank loans. 

Also read: Digital Gold Scams You Need to Be Aware Of That Could Wipe Out Your Savings

How Family Loan Impacts CIBIL Score?

Usually, family loans are mostly informal and are built on trust. Many people do not even realize that these loans can impact their financial health, CIBIL score. Let’s clarify how it affects your CIBIL score, both directly and indirectly. Does family loan have a direct impact? – No. Though it is a fact that family loans don’t impact your credit score directly, that doesn’t mean that they are irrelevant to your financial journey. 

A few of your financial habits that costs your credit score are:

  • Using Family Loan to pay EMIs – Opting for a family loan to cover your EMI repayment or any formal debts like credit card bills or personal loans, that timely repayment reflects in your report.
  • Over-Reliance on Informal Loans – Relying heavily on family support instead of taking a formal credit indicates you have a “Credit Invisible” profile. This means that you have little to no credit history. This can hurt your future chances of credit approvals.
  • Missed Credit Opportunities – You are missing out on building your credit score by not taking any formal loans or credit products like a credit card or a personal loan.
  • Co-Signing or Guaranteeing a Loan for Family – When you co-sign or guarantee a loan for your family, in case of  any default or missed repayments, it affects your credit score negatively.
  • Pro tip: If your goal is to build or improve your CIBIL score, it is important to consider taking small formal credit products even while accepting credit support from your family as and when required.

Alternative Solution

When it comes to family loans, it is easier and more convenient compared to any formal bank loans. However, it will not help you to build your CIBIL score in any possible way. A few of such alternatives are:

  • Maintaining a secured credit card.
  • Small personal loans. Borrow a small low loan from banks or NBFCs.
  • Use Buy Now, Pay Later (BNPL). Use apps like LazyPay for short-term credit availability.
  • Get a Credit Card Add-on. Get yourself added to a family member’s credit card.
  • Use consumer durable loans to make EMI purchases of appliances or electronics.
  • Avail Credit Builder Loans offered by NBFCs exclusively for new borrowers.
  • Pro Tip: Always repay on time. Even small defaults hurt your score.

While family loans offer short-term relief, they don’t build your CIBIL score. Opting for small, manageable formal credit and repaying on time is the key to creating a strong financial foundation and unlocking better credit opportunities in the future.

Written by Kavitha Sugumar

The post Shocking Truth: Can a Family Loan Destroy Your CIBIL Score? appeared first on Trade Brains.

Borrowing money from family members or close friends is common in India, especially if you want to avoid the paperwork, interest, or worry that come with traditional loans. When they need money for credit card bills, weddings, or emergencies, many people turn to their loved ones instead of banks. However, “Will this affect my CIBIL
The post Shocking Truth: Can a Family Loan Destroy Your CIBIL Score? appeared first on Trade Brains.   Read MoreCredit Cards, CIBIL score, cibil score chcek, cibil score check online, cibil score free check, cibil score full form, cibil score range, family loan impact on cibil score Trade Brains