Each one of us must be aware of the simple concepts of lending and borrowing. We would have even been in situations where a person has borrowed money and fails to return the amount, and this makes you reconsider your decision to lend them money again. In the same manner, financial institutions issue credit cards and loans to people who they feel are creditworthy. But, how do they evaluate the creditworthiness of an individual? One such significant metric which is being used by all credit institutions is the CIBIL Score. It is an important factor that is considered when you apply for loans or credit cards. You must be aware of how the score is calculated and why is it very important to have a good CIBIL score. Read on to know all about a CIBIL score.
CIBIL score – What exactly is it?
A CIBIL score is nothing but the summary of the credit history of an individual depicted in 3 numeric digits. This specific score reflects an individual’s creditworthiness, and this is based on the individual’s history of borrowings and repayment. You can derive these details in the sections “Accounts, as well as “Enquiries” of your credit report. The details include credit card data, loan accounts, the status of payments along the outstanding amounts. A CIBIL score will range anywhere between 300 – 900; the higher the score, the higher are the chances that your loan will be approved. As a matter of fact, the majority of the loans are sanctioned to consumers who have a CIBIL score that is higher than 750.
CIBIL Score – Who Computes it?
TransUnion CIBIL, which is a credit information company or better known as a credit bureau was incepted in the year 2000. It is the first such bureau formed in India. The CIBIL scores are computed by this firm based on the information that is stored in the individual’s repository. TransUnion CIBIL is renowned for its transparency and accuracy in terms of score calculations.
CIBIL score – How is it calculated?
A CIBIL Score is affected by 5 main factors. They are:
An earning individual might have certain credit limits, be it a loan or a credit card. But, in case you use these facilities to the maximum, it indicates a credit-hungry behavior which is observed by financial institutions as red flags. In case you always maintain a specific level of credit every month, however, you start spending a lot more you suddenly, it could reduce your score. It is good to have a balanced mix in terms of secured as well as unsecured loans. A high limit of credit utilization also is an indicator of an increase in debt burden over a period of time and it can have a negative impact on your score
2. History of Repayment
A bad credit record is considered by NBFCs and banks as a sign of the possible future behavior of an individual. You must remember that each time you avail of any credit or loan, the lender will report the same to CIBIL. The bank takes account of whether your debt is repaid on time or not. In case you try to make an advance repayment, it is taken positively, as it indicates that the bank can trust you to make the repayment. If you make late payments or you happen to default on EMIs, it affects your score negatively.
3. Numerous Enquiries
If you have made a lot of inquiries related to loans, it could negatively impact your CIBIL scoring, because it is an indicator that you could have a lot of loans in the future.
4. Debt to Income Ratio
Usually, financial institutions do not encourage individuals to opt for additional debts. In order to ensure this is in check, they have a DTI which determines the ability of a loan applicant to repay the loan based on their income. This inculcates financial discipline and makes sure the individual can repay all future EMIs of their loan without feeling the burden.
5. Multiple Existing Loans
Having a lot of loans is always a concern when you apply for additional loans; for instance, having a personal loan, a housing loan, a vehicle loan, and even many credit cards. Make sure you close a loan before you go in for the next loan. You must focus on closing all small loans at the earliest.
How can you get a good CIBIL score?
Though the CIBIL score depends on the credit history as well as past payments of an individual, however, it has an impact on all their future loans and credit. So can you have a strong CIBIL score? A few tips are mentioned below which will help improve the credit score:
1. Make sure your EMIs are paid on time. Avoid late payments.
2. Do not use a lot of credit
3. Have a healthy mix of credit mix of secured loans like home and auto loans, as well as unsecured loans such as personal loans or credit cards. Do not have many unsecured loans.
4. Do not continuously keep applying for credit
5. You must keep track of your joint accounts. Note that any negligence on part of the joint holder could affect your ability to get access to credit whenever you require it.
6. Keep reviewing your credit history regularly. The CIBIL score, as well as a report, should be monitored regularly, as it helps you be aware of any inaccuracies and discrepancies. In case of a discrepancy, a dispute can be logged in or you could also request the lender to correct and report the same to CIBIL.
How to differentiate between a Good and Bad Score
The higher the CIBIL score, the better it would be in availing credit in the future. Mentioned below are the CIBIL scores and what they mean:
1. 850 – 900
It indicates that the individual has never defaulted anytime. This is a great score.
2. 750 – 850
The fact holds that about 79% of the loans are sanctioned to those having a score of 750+. A score above 800 is a good score and this can help you request a low rate on credit cards or personal loans.
3. 700 – 750
This score is great for secured loans. But, the bank could further investigate when it comes to unsecured loans and could also impose a higher rate.
4. 500 – 700
This score indicates that an individual has defaulted in payments in the past. It can be tough to get personal loans from banks.
5. 300 – 500
This is a poor CIBIL score indicating many discrepancies in previous loan repayments and they cannot be ignored. You must work hard on credit improvements; else it is impossible to get loans from any bank.
A CIBIL score is an indicator of the financial integrity of an individual. It gives the lender the sign to either lend or avoids lending to that individual. A poor score can increase your interest rates and make it tough to secure any kind of loan from any financial institution. Hence, it is advised to pay your dues on time and avoid opting for multiple loans. Always ensure you clear off smaller loans before you dive into a bigger loan. A few simple steps will help you have a great CIBIL score.