All You Need to Know About CIBIL Score

If there is one term that those looking for loans or credit cards should be aware of, it is ‘Credit Score’. A credit score is a three-digit number that is a representation of the creditworthiness of an individual. Every time an individual applies for a loan or credit card this score determines whether he/she is eligible to avail the same. A lender such as a bank or other financial institutions will first evaluate the applicant’s credit score in order to decide whether to accept their application or not. Additionally, the applicant’s credit score will also determine the interest rate imposed on the loan as well as the amount of loan that is sanctioned.

What is a CIBIL Score?

Credit scores usually range between 300 and 900 with 900 being the highest possible score. This score is prepared by one of the four functioning credit bureaus in India, the most popular of which is TransUnion CIBIL.

CIBIL, One of the largest and most trustworthy credit information companies in India, TransUnion CIBIL aggregates consumer borrowing and payment information in order to assess loan risk and to set rate of interest. This company counts some of the top NBFCs (Non-Banking Financial Company), insurance firms, and banks as its clients. CIBIL score is sometimes used interchangeably with credit scores due to its popularity. According to sources, CIBIL has access to the credit information of over 600 million people and also counts around 2,400 lenders as members.

Why Do Lenders Check CIBIL Scores?

Credit scores, as mentioned previously, are used to assess the risk associated with a borrower. Lower the score means higher the risk and therefore, lower are the chances of the borrower availing a loan. Even if he/she does procure the said loan, it is usually at exorbitant interest rates as these individuals are considered to be likely defaulters and therefore are risky borrowers. One’s credit score becomes even more important for availing unsecured loans or loans that do not require collateral.

Did you know that businesses also have credit scores assigned to them? Similar to the risk assessment of an individual, a business with a higher credit score can attract financial support or investments a lot more easily. Therefore, lenders such as banks or other NBFCs check the applicant’s credit score prior to approving a loan or a credit card.

What is an Ideal CIBIL Score?

As mentioned previously, a credit score is a three digit number. The magic number that is considered to be a good CIBIL score is between 750 and 900. The closer to 900, better is the CIBIL Score. Most lenders make it mandatory for an individual to have a minimum score of 750, below which either loan applications are rejected outright or the interest rate imposed is extremely high

Factors that Affect CIBIL Score

Your credit score is calculated based on certain important factors. These include:

  • Multiple Loan Applications
    Procuring different loans for different purposes is understandable, such as auto loans for cars, home loans for construction of houses, etc.; however when you apply for new loans or credit cards, the lending company runs an inquiry on your CIBIL report in order to check your credit score and history. Multiple queries, especially within a short period of time will negatively impact your score as you will seem to be ‘credit hungry’. Additionally, multiple loan applications will also give the impression that the amount to be repaid will be high and hence there is a greater chance of default.
  • Credit Repayment History
    Repaying your credit card bills or loan amount in time is crucial to maintaining a good credit score. Sometimes individuals only pay the minimum balance due and increase their repayment tenure or sometimes even miss payments. This can have a significantly negative impact on the credit score.
  • Percentage of Unsecured Loans
    Unsecured loans are those that do not require collateral in order to secure the same. Most personal loans fall under this category. As collateral is not required, the interest rate on these loans are quite high. If an individual has availed multiple personal loans or credit cards, banks and lending institutions can interpret this as mismanagement of finances. This generally has a detrimental effect on the credit score. Having a healthy balance of secured and unsecured loans is advised.
  • Overlooking Mistakes in Credit Report
    Although mistakes in credit reports are rare, it is possible and if these mistakes are not rectified immediately the results can be dire. Individuals are advised to check credit reports every six months and rectify any errors. Delayed or faulty reports from financial institutions can reduce your credit score. It is also to be noted that CIBIL does not correct reports but will have to be rectified by the lenders directly.
  • Increase in Credit Limit
    Requesting for an increase in credit limit is not unusual but if the frequency of these requests is high then your credit score will be negatively impacted. This is because, in order to increase the credit limit, banks will ask for CIBIL reports and these hard inquiries can reduce your credit score as mentioned previously.
  • Credit Utilization Limit
    Every credit card or loan comes with a set credit limit and keeping an eye on this is essential, especially in the case of credit cards. According to certain experts, one should not exceed more than 30% of the given credit limit. Spending over 50% of the limit can raise red flags as it indicates that they are at a higher risk of defaulting
  • Closing Credit Card Accounts
    Credit cards are an ideal way of building credit history and if you close a credit card account, the long history associated with it is lost and this impacts the credit score. Therefore, keep a credit card account open for as long as possible and if one needs to close a credit card account then it is better to do so if the card is relatively new.
  • Loan Servicing Term/Length of Credit History
    This refers to the number of years that have passed since a credit account was first opened. Having a long loan servicing term or credit history is ideal as it is a sign of an individual who is prompt with his/her payments. Additionally, building a good credit score takes time and focusing on this in the initial years will ensure easy availability of loans such as home loans later on.
  • Acting as Guarantor for a Defaulter’s loan
    While this does not directly have an impact on the guarantor’s CIBIL score, if the applicant defaults on the said loan it can have a detrimental effect on the guarantor. Therefore, acting as a guarantor is never advised.
How is CIBIL Score Calculated?

The CIBIL Score is calculated based on four important factors.

  • 30% of the score is depending on the payment history. Credit history has the highest weightage and plays a significant role in determining one’s credit score. Banks and other financial institutions send credit related as well as personal information to credit bureaus which then collate all this information onto the credit report and calculate the score based on complex algorithms. This report will have information on whether accounts have been settled, defaulted, written off, etc. Therefore, it is important not to miss EMI payments, or default on them as this can significantly derail the credit score.
  • 25% of the score is based on credit utilization and existing debt. How much one spends with respect to their credit limit along with how much they already owe are important criteria. If one uses a lot of credit in comparison to income and their credit limit, then it does not reflect well on the credit score.
  • Another 25% of the score is based on credit exposure along with credit mix and duration. Your CIBIL score will be impacted by the number of unsecured and secured loans that are a part of your portfolio. Delayed and defaulted payments will also impact the score. It is to be noted that secured loans have a more positive impact on your credit score as compared to unsecured loans
  • The remaining 20% comprises other factors such as the number of credit applications made in the recent past, especially those that were unsuccessful. Multiple inquiries can have a negative impact on the credit score as the applicant will come across as credit hungry and more likely to default.

All of these, combined together form the CIBIL credit score. Individuals are advised to check their CIBIL credit score regularly to ensure that the score is on the higher side as well as to monitor if there are any errors in the report.

How to Read and Understand CIBIL Credit Report

The CIBIL credit report is essentially a detailed document that displays an individual’s entire credit record and history. This report has multiple details such as personal information, contact details, employment history, credit cards and limits, credit balances, duration of the credit, and so on. This report is usually procured by lenders such as banks and Non-Banking Financial Companies (NBFCs), landlords, and creditors. The CIBIL report comprises of four main sections:

  • Account History
    This section has details related to all credit accounts such as type of credit that was borrowed, name of the lender, account number, date the account was opened on, most recent payment, amount of loan borrowed, current balance, and a monthly record of up to 3 years of repayment.
  • Public Records
    Details of major financial issues both previous and current such as bankruptcies and criminal arrests are in this section. The information in this section has a significant impact on the credit score as more the number of financial slip-ups, lower is the credit score.
  • Credit Summary
    This section contains details of all credit accounts the individual may have had in the past or even currently along with information about the balance. The account information is divided into revolving accounts, instalment accounts, real estate accounts, and collection accounts.
  • Credit Enquiries
    This is a section that lists information regarding third parties that have accessed an individual’s credit report within a period of 2 years. Each time a lender checks an individual’s credit report, it is counted as an inquiry. Lenders and financial institutions may be allowed to view only a small section of this although the applicant can view all credit inquiries. These inquiries are based on loan or credit card applications. In order to check the CIBIL score, one has to visit CIBIL’s website, pay a small fee, and then check the score.
Tips to Maintain Good CIBIL Score

Although having a high credit score is not very easy, following some of the tips below can help one maintain a good score and alternatively increase the score if needed:

  • Cancel dormant credit cards if new, if not try to utilize it in a way that does not disrupt your payment schedule
  • In case a lengthy loan tenure is chosen, ensure that pre-payments are made whenever possible to prevent heavy financial burdens in the future
  • In case loans or credit cards do not get approved, do not reapply for the same immediately. Try to work on increasing the credit score before applying again. Similarly do not apply for multiple loans within a short amount of time unless a proper repayment plan is in place
  • Manage all credit cards and loans carefully by keeping reminders of the same so that repayment is done along with the interest within the given tenure
  • Pay all EMIs on time and keep a record of the same
  • Try to negotiate a rate of interest keeping your financial situation in mind. Additionally, consulting financial experts to help with the same is also advisable

Those that do not have any credit history can procure a personal loan and repay the same to build credit or acquire a credit card and make timely payments.

How to Avail Loan with Low CIBIL Score

Although having a good CIBIL score (above 750) is important, sometimes financial troubles can strike at the most unlikely times. The good news is that despite having a bad CIBIL score it is possible to procure a loan. Any of the following options can be chosen for the same:

  • Cancel dormant credit cards if new, if not try to utilize it in a way that does not disrupt your payment schedule
  • Opt for informal methods of borrowing such as fundraisers or requesting family or friends
  • Try to avail a loan from NBFCs. While a decent credit score is still required, the number is not always as high as those necessitated by banks
  • Secured loans come with a lower rate of interest and if collateral can be provided then this is the next best option
  • Another option is to apply with a co-signer or guarantor as this will distribute the burden of the loan and if the co-signer has a good credit score then a larger loan amount can also be availed
  • Lastly, while a low credit score is not good for anyone’s financial standing, it can always be rebuilt. Hence, this should be the main focus
How to Check Credit Score on MoneyView

Certain sites, apart from the official CIBIL website, offer customers the opportunity to find out their CIBIL score. While one cannot directly find their CIBIL credit score on our Money View website at present but the credit report and score will be shared with those who apply for a loan through Money View regardless of whether the application is accepted or rejected.

Having a good credit score is advantageous in every way. While a good score is not built in a day, there are multiple ways in which one can ensure a CIBIL score of over 750. Avoiding bad financial decisions, paying EMIs on time, and ensuring proper spending are just some of the ways through which one can enjoy a good CIBIL credit score and a secure financial future as well.