What is CIBIL? Understand How It Works & Its Importance

CIBIL, more concisely TransUnion CIBIL Limited, is one of the leading credit information companies (credit bureaus) in India. Its primary function is to provide credit report and credit score for individuals and credit rank for companies known as CIBIL scores. CIBIL score measures a person’s ability to repay a loan amount. It is denoted by a three-digit number ranging between 300 and 900. An ideal score should be one closer to 900 since it improves the chances of access to credit products, like loans and credit cards.  

What Score do Lenders Expect You to Have?

As per lenders and financial institutions, a CIBIL or credit score above 750 is considered good. A CIBIL score higher than 750 typically projects the borrower as responsible and reliable when it comes to loan repayment. The credit score is composed of 30% payment history, 25% credit exposure, 25% credit duration and type, and the remaining 20% of other miscellaneous factors. 

How Does CIBIL Score Work?

Once borrowers have established what a CIBIL score is, they should also know how it works. CIBIL score fluctuates constantly based on the credit history and overall performance. Listed below are some parameters on which CIBIL score is based. These are:   

Payment History

Borrowers having a previous credit history with timely repayments, such as that of a credit card or a personal loan, have a better chance of having a good CIBIL score. The longer the history, the better the score. On the contrary, simply having a long credit history is of no avail if it is marked with payment delays and defaults.  

Credit Mix

To maintain a high and decent score, it is important for the borrower to have a healthy mix of unsecured and secured loans. Secured loans refer to car loans, home loans, etc. while unsecured loans include personal loans and credit card bills. 

Loan Enquiries

CIBIL score is greatly affected by multiple credit or loan rejections. A borrower availing of multiple loans naturally has a huge debt to pay. This adversely affects their credit rating and warns lenders about probable loans in future. 

Over usage of your Credit Card

CIBIL score is largely affected by higher credit usage. Therefore, one should try and keep credit utilization low, preferably at 30%. The higher the credit usage, the more the number of debt holders.  

CIBIL or the Credit Bureau assigns an updated score to all based on the above parameters. When a person applies for a loan, the lender assesses the updated CIBIL report and scores for financial credibility. The loan is sanctioned immediately provided they qualify the requisite criteria. 

Credit Score Vs Credit Report in CIBIL

Parameter of         Comparison	Credit Score	Credit Report
What is it?	It is a numerical value between 300 to 900	It is a report of all your credit related transactions and account information
What does it contain?	It is a summary of all your information	It has four categories: identifying information, credit accounts, credit inquiries, and public records.
Can I change it?	You can’t raise a dispute on your credit score	You can raise a dispute if you find any discrepancy in your report
How many times can I check?	Your Credit score can be referred to for FREE throughout the year any number of times	You are entitled one FREE credit report each year by every Credit Bureau after which you may have to pay a negligible amount to download one
What category of enquiry is it?	Falls under soft enquiry	Falls under hard enquiry
When is it referred	To identify your loan eligibility	To approve your credit application
Where can I find it?	On CIBIL or Bajaj website	On CIBIL or Bajaj website

 

Reasons Why CIBIL Score is Important

The credit score is the representation of one’s credit health. It offers the lender a brief idea of one’s repayment capability. To elaborate further, here are the top reasons why CIBIL score is essential – 

Credit Status

The credit report and score update the borrower on their current status and how to improve it further. The CIBIL report summarizes one’s past and present credit transactions. Regularly monitoring the report thus helps rectify any discrepancies that may have led to a poor CIBIL sore. 

Loan Eligibility

As mentioned, lenders and financial institutions generally consider a CIBIL score of 750 and higher as ideal. Therefore, it is necessary to build and maintain a healthy credit score that guarantees loan eligibility and makes approvals easier.  

Creditworthiness

One of the most important aspects of the CIBIL score is creditworthiness – the ability to manage finances. With a good record of credit history, loan approvals are usually prompt. The best way to increase credit score is to pay off bills and credit card dues on time.  

Application Approval

The CIBIL or credit score reflects how well the borrower pays off loans on time. This helps the lender decide how big an amount should be granted so that the borrower does not default on payments. With a score lower than 600-650, the lender may be reluctant to approve the loan application thinking they have missed paying the loan on time and have accumulated a rather huge debt. To get quick approvals on credit cards and upcoming loans, the objective should be to improve the score. This will also help better one’s overall financial standing and lower the risk of incurring debt. 

Affordable Rate of Interest

The higher the CIBIL score, the lower will be the loan interest. This is because lenders and financial institutions consider the borrower’s profile impressive and worthy of paying the loan amount going by the records. Besides, affordable interest rates imply better financial stability, which encourages borrowers to apply for loans if needed in future. 

Additional Read: Tips to Avail of a Competitive Home Loan Interest Rate 

Loan Amount

The CIBIL score determines the amount of money to be borrowed. If the score is higher than the requirements of the financial institution or bank, then the customer is considered eligible to borrow a larger sum. This means a decent CIBIL score will prove beneficial when purchasing a car or a house.  

Longer Repayment Tenors

With a good CIBIL score, one can enjoy longer repayment tenors, which makes it easier to pay off loans on time. However, in such cases, the rate of interest may be relatively high. Now that potential borrowers are of what is a good CIBIL score, they must visit the lender’s website to check their credit score and report.