Everything You Should Know About Your CIBIL Score

A CIBIL score or a credit score is a numerical expression of an individual’s credit record based on the information sourced from credit bureaus like CIBIL TransUnion, Experian, High Mark and Equifax. While evaluating a loan application, this is one of the most important factors that lenders usually assess right at the start. The scores denote the potential risk of lending funds and safeguard lenders against losses due to bad debt. The credit score composition is mainly based on a person’s loan repayment behaviour. 

What is a CIBIL Score?

Credit bureaus collect vital data such as the history of loans, total available credit balance, and the duration of the loans while reviewing an individual’s credibility and generating credit scores. Your CIBIL score is a three-digit number ranging from 300 to 900. A high score represents a good credit history. Hence, the closer your score to 900, the better your creditworthiness. On the other hand, a lower score indicates that you need to work on your credit score to maintain an optimum credit history. Credit scores play a significant role in the Home Loan approval process as the first screening criterion.   

What is a Good CIBIL Score?

Generally, lenders prefer applicants with a CIBIL score of 750 and above. Such a CIBIL score reflects responsible credit behaviour and your creditworthiness to the lender. A score in this range qualifies loan applicants for the most competitive loan deals. However, if your score is below 750, you may have to contend with loans at higher rates of interest raising your total cost of credit.   

​​Also Read: Know What CIBIL Score is Good for a Home Loan  

CIBIL Score Range in India 

The table below indicates what each range of credit score signifies while trying to avail of loans:  

Benefits of a Good CIBIL Score 

A good credit score is your gateway to the best possible loan offerings as mentioned below: 

Easier Loan Sanctions

Upon receiving a loan application, lenders examine your credit score and credit records to understand how you handle your finances. If they are satisfied with your CIBIL score, they will approve and sanction your loan. A good score will fetch you quicker loan approvals, while a low score could lead to stringent verification measures and, in some instances, loan rejection.

Faster Loan Disbursal

Following quicker loan approvals, applicants with the right credit scores can expect faster disbursal of their desired loan amounts to conveniently use as per requirement.

Lower Interest Rates

Ideal CIBIL scores can give you the negotiating power to bag attractive interest rates and terms.

How to Maintain a Good CIBIL Score?

One can maintain a good credit score through consistent financial practices by following these steps:

• ​Pay your EMIs and credit card bills on time to build a good track record.

• Cancel dormant credit cards and retain the number of cards depending on actual usage. 

• Use just one credit card or set payment reminders for bills and loan EMIs to efficiently manage credit repayments.  

• Clear the outstanding bills in full each time to avoid accumulating extra interest. 

• Do not apply for loans and credit cards in quick succession if you have been rejected on several counts. 

• Avoid applying for a number of loans around the same time. 

• Select loan tenures after careful deliberation and try to make part-prepayments whenever possible. 

• Keep track of your credit record and your credit score frequently. If needed, ensure necessary steps to improve the CIBIL score. Check for any inaccuracies and errors in the report and immediately rectify them. 

How Exactly is the CIBIL Score Calculated? 

A number of elements come into play during the CIBIL score calculation. The table below indicates the 4 factors and the weightage of each factor.   

​Let's learn more about each factor in detail.

Credit History

Credit history has a 30% weightage in the calculation of the CIBIL score. Banks and financial institutions send personal and credit information to the credit bureaus where they are collated into a credit report and assigned a credit score. Credit bureaus can view the monthly records of your EMI and bill payments for the last three years. The records show the status of each account - outstanding or settled -  and whether there have been defaults or delays in payments, which can adversely affect your credit score.  

Credit Utilisation

The credit utilisation ratio shows the amount of funds one has used with respect to one’s credit limit. If you do not keep a manageable ratio; then over a period of time, an elevated credit utilisation will add to your burden of debt garnering a low credit score. Credit utilisation comprises 25% of your credit score. 

Credit Mix and Duration

The composition of your credit portfolio, also known as the credit mix, makes up 25% of your CIBIL score. It includes the number of secured and unsecured loans of long and short tenures availed over the years. If you have more secured loans, it boosts your score. In comparison, obtaining more unsecured loans leads to a lower score.  

Other Factors

Other aspects like the number of credit applications made in the past and similar considerations account for the remaining 20% of your credit score. A high number of applications creates a negative impression lowering your score. 

Credit Score Mistakes You Should Avoid

Individuals should steer clear of a few common mistakes listed below to conserve their credit score: 

• ​Do not hold too many unsecured loans in the credit portfolio.

• Never delay or miss credit and loan payments. 

• Avoid making multiple or unnecessary loan applications. 

• Don’t overstep the available credit limit. 

Also Read: Some of the Common Credit Score Mistakes to Avoid

How to Check Your CIBIL Score?

The Reserve Bank of India mandates that all four credit bureaus provide a free CIBIL score check once a year. Interested individuals can visit the bureau and request for their score through postal or online services. You may be asked to furnish certain documents for verification during this process. 

Also Read: Step-by-Step Guide to Check CIBIL Score Online 

Factors that Impact Your CIBIL Score

In order to manage one’s credit score effectively, it is important to be aware of the factors that can affect your credit score. These include: 

• Your income 

• Existing debts 

• Past credit repayments 

• Any defaults, delays or lapses in repayment 

• Rejection of loans  

Individuals should always keep a high credit score to easily receive higher amounts of funding on their own terms. Therefore, one should try to maintain a good CIBIL score by adopting smart financial habits. Bear in mind that even with the ideal CIBIL score, it is still essential to check for the loan schemes of various other lenders. Carefully study and compare their loan offerings and interest rates. Check the eligibility criteria, documentation, additional charges, and other relevant requirements. This way, you can choose the right lender and the perfect loan scheme that caters to your priorities.  

Difference between CIBIL, Equifax, Experian, and High Mark

There are 4 RBI-authorised credit bureaus in India – CIBIL, Equifax, Experian and CRIF High Mark. They are licensed by the RBI to collect and maintain credit related data provided by creditors of individuals and businesses. This data is then compiled into a credit report and churned to derive a credit score. Here are some key differences/similarities between all 4 credit rating agencies. 

CIBIL

CIBIL, more correctly Transunion CIBIL, is the most preferred credit bureau in India. All the major banks, NBFCs, financial institutions and housing finance companies report their consumer information to CIBIL. The CIBIL score is in the range of 300 to 900. Founded in the year 2000, It is the oldest of the four agencies in India. 

Equifax 

Equifax in India is registered as Equifax Credit Information Services Private Limited (ECIS) and is headquartered in Mumbai. It is a joint venture between Equifax and seven leading financial institutions in India. Many banks, NBFCs, financial institutions and housing finance companies report their consumer information to Equifax. It provides an Equifax score between 300 to 900. 

Experian 

Experian started its operations in India in the year 2010. It also works on the same denominator as CIBIL where the credit score is between 300 to 900. Experian is also the first credit information company to be licensed by the Credit Information Companies (Regulation) Act 2005 (CICRA 2005).   

CRIF High Mark 

Founded in 2007, the company has a predominant presence in Europe and India but received a license to operate as a credit bureau in 2010 from the Reserve Bank of India (RBI). The credit score range is from 300 to 900.  

Common CIBIL Score Myth
 

Each Time I Check My Credit Score, It Decreases 

This is the most common fear people have which hinders them from checking their credit score often. But the fact is, when you pull your credit score, it is counted as a soft enquiry, and this does not lower your credit score. In fact, updating yourself with your credit score improves your chances of getting credit approved. 

Closing Old Credit Cards Will Delete My Credit History 

Closing credit cards won't instantly erase past defaults; it takes years for delinquencies to be removed from your credit report. Furthermore, retaining old credit accounts is beneficial as they contribute to a longer credit history, which may positively impact your creditworthiness.

Low Income Equals Low Credit Score 

Income has got nothing to do with credit score. If at all it does, it affects your credit limit which may eventually affect your credit behavior and lead to an improvement or decrement in the credit score. 

CIBIL Score and Debt Consolidation

Understanding Debt Consolidation

Debt consolidation refers to the act of taking out a fresh new loan to pay off other existing loans or credit cards. What you are essentially doing is combining multiple debts into a single, larger loan, so that you may find more favourable payoff terms, such as a lower interest rate or lower monthly payments and be able to better streamline your EMI when it’s single. In addition, it will simplify your financial life and give you a better chance at improving your credit score. 

Impact of Debt Consolidation on CIBIL Score 

Debt consolidation can certainly help your credit score in the long term in more ways than one. Going with the right lender can reduce your monthly payments which should enable you to pay off the loan sooner.  

It will reduce your credit utilisation ratio with an increase in your tenure. This, in turn, can help boost your credit score, making you more likely to get approved by creditors and for better rates. 

CIBIL Score and Loan Repayment

Importance of Timely Loan Repayment

Timely repayment of your loans should be your financial priority as defaulting EMIs can negatively affect your credit score and loan liability. Your loan repayment history, whether paid in time or delayed, is printed on the credit report which is visible to banks and financial institutions. If you have missed a few payments, you can face penalties and additional levies, besides being termed as a defaulter.  

This will negatively impact your future chances of acquiring a loan and there could be a risk of getting a loan at higher interest rates. Hence, it is essential to pay back on time as it will increase your chances of acquiring a loan at low interest with attractive offers. 

Understanding Loan Restructuring

Loan restructuring is a method used by not only individuals but also businesses and governments to avoid defaulting on current debts by negotiating reduced interest rates. When a debtor is in financial distress, loan restructuring can be an inexpensive alternative to insolvency. It can assist both the debtor and the creditor.

While debt settlement may help your financial situation, it would impact your credit score. The scale of the impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the amount being settled and whether your other debts are in good standing. 

Also Read: Boost Your Credit Score by Minding the Factors that Affect It