Why Is a CIBIL Score Measured Between 300 and 900?

Whether you are planning to avail of a Home Loan or already have one running, you must be familiar with the concept of CIBIL score. An individual's CIBIL score is a three-digit number ranging between 300 and 900 that denotes their creditworthiness and repayment capacity.  

In India, four credit information bureaus collate data on individuals and their attitude towards credit. These are: Experian, Equifax, TransUnion CIBIL and CRIF Highmark. Of these, TransUnion CIBIL is the most well-recognized credit information bureau and most lenders in India work with TransUnion CIBIL. TransUnion rates individual's creditworthiness and repayment capacity in the form of CIBIL score which ranges between 300 and 900. There is no specific reason or clarity regarding why TransUnion decided to begin its credit score rating from 300. Most people assume that it's because 300 is a decent number to begin with; assigning 0 or 1 as credit score to an individual may not look so nice.  

Now that we have some clarity around credit scores, let us look at how credit information bureaus calculate an individual's credit score. 

What Makes Your Credit Score Swing Between 300 and 900

When potential borrowers apply for a home loan, the first thing that a lender checks are their credit score. Credit Information Bureaus collect information about borrowers from lending institutions and based on this information, they calculate an individual's credit score. Let us look at the various factors that affect a borrower’s credit score and let us take a deeper look at how credit scores are calculated.  

Past Repayment Behaviour

This is one of the key factors that affects your credit score. Credit Information Bureaus collect information from institutions regarding how regular you have been in your EMI and bill payments. Based on this information, they assign you a credit score. A single missed EMI payment can drag down your credit score by a few points. So, make sure to clear all your EMIs and bills on time.  

People Also Read: How to Calculate Home Loan EMIs 

Hard Enquiries Registered Under Your Name 

When a borrower checks their credit rating, it is known as a soft enquiry. Soft enquiries do not affect an individual's credit score. However, when an individual applies for credit and the lending institutions requests to check the borrower's credit rating, the request is registered as a hard enquiry. Too many hard enquiries show an individual to be credit hungry and this affects their credit rating negatively. One must, therefore, apply for credit only when necessary.  

Number of Credit Accounts and Their Age

The number of credit accounts you have affect your CIBIL rating because they allow the credit information bureau to analyze the ratio of secured to unsecured loans in your account. The more varied your credit portfolio, the better will be your credit rating. Further, the age of your credit account allows credit analysts and experts to judge for how long you have had access to credit and how well have you managed it in the past.  

Credit Utilization Ratio

Credit ratio utilization ratio is the ratio of the credit being used to credit available. For instance, if your credit card has a limit of Rs.1 Lakh and you are using Rs.40,000 each month, your credit utilization ratio would be 40%. Ideally, borrowers must try and keep their credit utilization ratio under 30%. 

An individual's credit score is one of the key factors that affects how easily they will get approved for a loan and what will be the terms and conditions of the loan. If you are planning to apply for a loan, check your credit score first and apply only if your credit rating is good.