What is a CIBIL Score?
CIBIL Score is a 3-digit number that represents your credit history. This score is calculated based on your credit report which contains your credit history. The CIBIL score is between 300 and 900. A high score implies a good credit history. So, the higher the score is near 900, the better. If you have a score close to 300, there is a good chance your credit card application will be rejected.
Why is the CIBIL score important?
As noted above, this is the most important factor used by credit institutions to check your credit worthiness when applying for a loan.
Here are the benefits of a high credit score
To get loan approvals:
When you apply for a loan, the lender will check your credit history before granting you credit. The best way to do this is to check your credit score. A CIBIL score indicates your credit worthiness with the lender. If your credit score is high, the lender will consider lending you safely and your loan application will be accepted after assessing your repayment capabilities. But if your credit rating is low, your loan application will be rejected even if you have the repayment capabilities.
Use a loan at a lower interest rate:
For quick loan disbursement:
A high credit score will help you get loan approval faster. Faster approval means loan disbursement will also be faster.
How is the CIBIL score calculated?
The basis of calculation is your credit history. The credit bureau gathers all the information about you in one report to calculate your CIBIL score. It is calculated based on your account and the section of your credit report. Here are the factors taken into account in calculating your credit score.
Your credit history is weighted as much as possible when calculating your credit score. The way you served your prior claim weighs 30% in calculating your credit score.
Composition and duration of credit
What percentage of your credit portfolio consists of secured loans and unsecured loans as well as the term of the loan, this will contribute 25% of your credit score.
The total amount of credit you have pending will determine 25% of your credit score.
Remaining factors such as the use of credit, the recent behavior of the credit will contribute the rest 20% of your credit score.
What are the factors that affect your credit score?
Late payments and defects
The credit score is calculated based on your credit history. Any default or late payment in recent years (past years) will have a negative impact on your credit score as it will give a negative impression of your credit worthiness.
Percentage of high use
The percentage of use is the ratio of the total outstanding amount of your loan to your credit limit. If you repay your debt on time and the balance of your loan and credit card stays down, your usage percentage will also decrease. This is taken positively by your credit bureau. But if the current credit or loan balance increases over time, it means the burden of your repayments increases. This will have a negative impact on your credit score.
Higher percentage of unsecured loans
A higher percentage of secured loans, such as mortgages or auto, in your loan portfolio is better for your credit score because these loans are usually available at lower rates. While unsecured loans are readily available, but are also expensive. A higher proportion of unsecured loans gives the credit agency the impression that you have to repay your debts with high interest rates.
High number of credit applications
A large number of credit applications means that you frequently try to qualify for loans. This describes you as a credit-hungry person at the credit bureau and affects your credit score.
When you apply for a loan, the lender first checks your CIBIL score. CIBIL stands for Credit Information Bureau India Limited. The CIBIL score is a three-digit number between 300 and 900. The closer the CIBIL score is to 900, the better it is. A credit score greater than 750 is considered a good score. A higher credit score increases your chances of getting a loan. In the case of unsecured loans such as personal loans, you can even negotiate a lower interest rate if your credit score is high.
However, a good credit rating does not mean that your loan application will be accepted automatically. The lender will also review your repayment capabilities before you repay the loan.
The credit score is calculated based on your credit history. It has the highest weighting of 30% in your CIBIL score calculation. Banks and financial institutions send personal and credit information to credit bureaus. The credit bureau then gathers all the information in your credit report and calculates the credit score. The credit bureau records the last 3 years of your payments for your bills and your EMIs monthly.
It also contains the details of your contributions on your past days, which correspond to the payments you made. So, if you have already defaulted or delayed the payment of your equivalent monthly payments (EMI) on one of your loans or if you make a late payment on your credit card, this will negatively affect your credit score.
Use of credit
Your credit utilization percentage is the percentage you owe to your lenders. It has a weighting of 25% in the calculation of your credit score. To calculate your credit usage, you need two things: your credit limit and the loan amount you have contracted. Divide the current loan with your credit limit to get your credit usage. The increasing use of credit over time is viewed negatively by credit bureaus. It shows that the financial burden of the person increases over time and gives a negative impression to the credit bureau.
Mixity and duration
Your CIBIL score will also depend on the composition of your loan portfolio, how many secured loans and unsecured loans do you have? It has a weighting of 25% in your CIBIL score calculation.
Secured loans are collateralized auto loans and home loans, while personal loans and credit card loans are unsecured loans because they have no collateral. Any default and late payment for any type of loan will have an impact on your credit score. However, the higher weight of unsecured loans shows that your score will be lower than that of someone who has never had an unsecured loan, despite the fact that both of you have made repayments on time. Secured loans have a very positive impact on your credit score if they are repaid on time.
There are other factors such as the number of credit applications you have made recently that counts for the remaining 20% in calculating the CIBIL score. It will be displayed under the Survey section in your credit report. A higher number of credit applications gives a negative impression to the credit bureau because it describes the borrower as an avid credit person.
Factors that Affect Your CIBIL Score
Having a good credit score is the key to a quick and easy loan. The first thing a lender will check is your credit score, when you apply for a loan. If you have a good credit score (a score greater than 750 is considered good), your loan application will be processed later. But if your credit score is at the bottom, your loan application will be rejected immediately.
It is therefore very important to have a good credit rating. And remember that you can not build a good credit score overnight because it is calculated based on your credit history.
In order to build a good credit score, you must know the factors that affect your credit score.
Listed below are some of the factors that affect your credit score.
Credit repayment history
The history of your repayments is the most important factor for your CIBIL score. Any default on loans and credit card bills will likely have a negative impact on your score. But if you have paid all your equal monthly installments (EMI) and your credit card bills on time, you will get a better credit score.
A high credit usage limit over time gives a negative impression to your credit bureau and has a negative impact on your credit report because it indicates the burden of your debt that increases over time. Credit usage is calculated by dividing your total outstanding balance by your credit limit. If your credit usage decreases over time or is low, it means that your repayment burden is decreasing and this will help improve your credit score.
Multiple loan request
When you apply for a new credit, such as a credit card, loan, etc., the bank or lending institution will investigate your CIBIL report to check your credit history and score. Too many of these queries have a negative impact on your credit score, as this could make you look like a credit-hungry person. You will be considered to be thirsty for credit if you apply simultaneously for several loans from several financial institutions. A multiple application will tell you that the burden of your loan will increase in the future and that it may be difficult for you to face your future debts.
Length of service of the loan
The duration of the loan service also has an impact on your CIBIL score. If you perform long-term debt service by repaying the loan amount in a timely manner, this will have a positive impact on your credit score.
High percentage of unsecured loans
A high percentage of unsecured credits, such as personal loan and credit card spending, is another factor that negatively affects your CIBIL scores. For many banks, this is a sign of poor personal finance management and they are reluctant to lend to one or more people. But, if you have more secured loans, the credit rating will probably increase.
Do not check your credit report for errors
It is necessary to check the credit report every six months to correct errors, if any. Late or erroneous bank reports may reflect incorrect information about your credit report and reduce your CIBIL score.
Increasing the credit limit
Frequent requests for a higher credit limit can also have a negative impact on your credit score. In this process, the bank asks CIBIL for your reports. And, this difficult investigation can hit your CIBIL score. Thus, upper limit requests are only needed when you really need them.
Give a loan guarantee
Acting as guarantor of a person’s loan will not affect your credit score, but if the person for whom you gave a default or delay payment, your credit score will suffer.