Cibil Score and credit score

What is your Credit Score? Why is it Important?

Credit scores are numerical values indicative of an entity’s loan repayment capabilities. They reflect the nature of an individual’s or a company’s credit history and worthiness. CIBIL scores, or any credit score, are generally expressed as three-digit numbers and are used by lending institutions to determine one’s creditworthiness and repayment history. Credit scores measure a person’s trustworthiness when repaying credit on time and per conditions.

If you want to know more about credit scores and wish to boost your CIBIL score and creditworthiness, this article has all the information you need.

Background of Credit Score in India

In India, the Reserve Bank of India has licensed four different agencies to evaluate and record credit information. Transunion CIBIL is the most prominent one that began its operations in India in 2001. A subsidiary of Transunion, an American multinational credit reporting agency, looks into the credit history and repayment behaviour of both people & businesses.

Other credit information bureaus in India are Equifax and Experian, each having its own rating system.

What is Considered a Good CIBIL™ Score Range?

A CIBIL score of 750 and above is considered an excellent CIBIL score. If your credit CIBIL score is within this range, expect faster loan approvals, low interest rates, and convenient repayment tenures.

Anyone with a score of 750 and above is eligible for different kinds of credit products & opportunities and quick loan approval across all financial institutions.

How to read your CIBIL report or credit report?

The CIBIL credit report details all the information about an entity’s credit & repayment history. It details any loan or credit card a person has taken, credit card balances, employment history, credit card limits, personal information, the dates on which they had opened loan accounts, and the entire repayment history associated with each credit account.

Four Most Important Sections in a CIBIL Report

  • Credit summary: This section details all information about any past and current credit accounts the subject holds, including their balances.
  • Account history: In this section, one will find information about every particular credit account, such as account type, number, & date opened, loan amount, last three payment records including the most recent payment date, and current balance.
  • Public records: This section mentions any cases of financial slip-ups, including missed or delayed EMI payments.
  • Credit inquiries: Here, one will find mentions of any business, organisation, or lending institution that has even inquired about the credit report.

How does CIBIL Compute your Credit Score?

There are certain key factors that a credit bureau like CIBIL uses to evaluate creditworthiness and assign a credit score.

They are:

  • Credit repayment history or payment pattern– Contributes 35% to the overall score; timely repayments can boost scores substantially
  • Credit balance and utilisation– Contributes to 30% of the score and is determined by the credit utilisation ratio. This is calculated by the amount of money loaned, the outstanding balance, and the amount of the sanctioned loan used.
  • Duration of availing credit– Contributes 15% to the score and is calculated by looking at timely repayment behaviour & the repayment duration.
  • New credit inquiries – Contributes 15 % and is determined by further new inquiries regarding loans or credit cards.
  • Credit mix– Contributes 10% to the score. The more diverse the credit mix, the higher one’s score can become.

Why do Lenders Check your CIBIL Score before Approving your Loan?

Lenders check CIBIL scores to determine one’s creditworthiness primarily. They do so by:

  • Checking credit repayment history
  • Records of any default or slip-ups
  • Look at the current credit balance
  • Determine credit risk and eligibility
  • Evaluate the best possible loan product and interest rate

What are the Factors that Affect your CIBIL Score?

The following factors affect your CIBIL score:

  • Credit Repayment Behaviour: Irresponsible repayment beahviour WILL adversely affect the credit score. A 30-day delinquency period can bring down CIBIL score by 100 points. Also, paying the minimum amount due reflects poorly on your score.
  • Credit Utilisation Ratio: Lower your credit utilisation ratio, the better will be your score. Do not exceed more than 30% of sanctioned credit limit, otherwise, rating agencies will consider you credit hungry and at higher risk of defaulting.
  • Current Debts: Any outstanding debt and unpaid dues will exact a heavy toll on your CIBIL score.
  • Credit History: Borrowers with longer credit history generally have higher scores. A longer record allows credit agencies to understand your credit behaviour better.
  • Credit Mix: The more diverse your credit profile, the better. having a healthy mix of secured and unsecured loans is preferable.
  • Multiple Credit Inquiries and Rejections: Too many applications and rejections indicates a credit-hungry behaviour and impact CIBIL scores negatively.

How does Outstanding Debt Affect your Credit Score?

Any outstanding debt and the level of utilisation of that debt affect the credit score. The more one utilises their sanctioned amount, the lower the score. This is the credit utilisation ratio that lenders check to evaluate outstanding debt.

Two Reasons Why Outstanding Debt Spells bad news for your Credit Score

  1.  It maximises your credit utilisation ratio: Outstanding debts mean that one has utilised the credit sanctioned but is unable to repay timely. This increases credit utilisation ratios and brings down scores.
  2.  It makes repayment of future loans difficult: Outstanding debts generally lead to high EMIs due to compounding interests. Borrowing additional loans will naturally lead to financial overburdening.

How to maintain a good CIBIL score?

  • Consistent Repayment: Always pay your EMIs on time to improve your credit utilisation ratio. Repayment history contributes to 35% of the score, and a flawless repayment history will always lead to excellent credit scores.
  • Low Credit Utilisation: If you have a credit card, do not avail it to the maximum limit and never cross it.
  • Credit Diversification: Diversify your credit profile as much as possible. A mix of secured & unsecured loans and short & long-term loans can boost the average credit score.
  • Avoiding Multiple Credit Applications: Do not make too many inquiries about loans and credit cards. Multiple inquiries and rejections reflect badly on your score.
  • Length of Your Credit History: Having a lengthy credit history and staying credit active is vital for a good score.
  • Closing Old Credit Cards: Evaluate credit history and then close old credit cards to boost credit score. Close only those not needed, as closing credit cards can impact your credit history.
  • Avoid Paying Only Minimum Due: Pay the full amount is due, and do not carry forward interests into the next bill cycle. Always pay in full and on time.
  • Score Builder Loans: Score builder loans are specially designed to improve the credit rating of new borrowers. They come in small amounts and can boost credit scores substantially.

How to Get a Loan Despite a Poor Credit Score?

If you have a low score and find it difficult to get a loan, here are some ways out.

  • Apply with non banking financial institutions. They have much more lenient eligibility criteria.
  • Apply with a guarantor or co-borrower who has a good credit score.
  • Avail of a secure loan and use any of your assets as collateral.
  • Show your lenders that you have the financial strength to repay the money.
  • Look for ways to improve your score.
  • Try to avail funds from friends and family.

10 Key Things That You Must Know About Credit Score

You can check your credit score and get a credit report for free

Credit information bureaus like CIBIL offer free credit reports if you sign up with them. This is a great way to check for errors and get a good idea about your credit history.

  • Not everyone has a credit score: If you have never availed of any loan or credit card, you will not have any credit score.
  • Factors that Make your Credit Score: Credit profiles, credit utilisation ratio, repayment history, outstanding debts, hard inquiries, etc., affect scores.
  • It takes time to build an excellent credit score: A good score requires a long credit history, a diversified credit profile, and a low utilisation ratio. All of this takes time.
  • Poor credit scores can be improved: Avail of score builder loans, repay on time, and clear outstanding due to improving poor scores.
  • Checking your credit score doesn’t hurt it: Monitor your credit health frequently, as merely checking your credit score does not affect it.
  • Credit score from different credit bureaus is not the same: Different credit information reports from different credit information companies will have different scores.
  • Multiple credit applications simultaneously can hurt your credit score: Avoid making too many inquiries or making too many loan applications. It will impact your credit health drastically.
  • Maxing out your credit limit can impact your credit score: Do not overshoot the pre-sanctioned credit limit on your credit card. If you max it out, it will adversely affect your score.
  • A good credit score can fetch you better terms on all types of loans: Lending institutions will trust you more and allow you to negotiate loan amounts, interest rates, and repayment tenures, and allow for quick loan approval.

What are the Benefits of a Good Credit Score?

  • Low-Interest Rates on All Types of Loans: This is probably the biggest benefit of a good credit score. It will help you negotiate better interest rates.
  • Improved Approval Chances for Loans and Credit Cards: Good credit scores lead to better chances and quicker approvals. Lenders trust you to make timely repayments.
  • Higher Credit Limits: Credit cards will have higher balances & higher loan amounts will be approved when you have a high credit score.
  • More Negotiating Power: An excellent credit score will make lenders consider you a responsible borrower and let you negotiate for higher loan amounts & easier rates, and longer tenures.

Smart Tips to Improve your CIBIL Score

  1. Pay Dues on Time: A flawless repayment history with no delays or lapses in payment can elevate the credit score substantially. Pay dues before the due date.
  2. Balance Credit Utilisation Ratio: Increase credit limit, do not exceed it, and pay dues on time. This will help keep credit utilisation ratios below 30%.
  3. Do Not Close Old Accounts: Long credit histories improve credit scores. Closing old credit accounts can thus adversely impact the score. Do not do so unless your score is quite high.
  4. Stop Applying for New Credits: The more loan inquiries you make and the more your loan applications are rejected, the lower your score will go.

FAQs

How can I get a score of more than 700?

700 is a good CIBIL score. You can get it by repaying loans & credit card bills timely, having a flawless credit history, and maintaining a low credit utilisation ratio.

How long will it take for me to get the best CIBIL™ score of more than 700?

A long and flawless credit history with timely repayments & zero delays and a diverse credit profile is necessary to score 700, which will take time. There’s no fixed timeline for increasing the credit score.

Can I get a loan or credit card with a credit score of 500?

500 is considered a poor score. It may be a bit tough to get credit from any commercial bank, public or private.

Will default from many years ago remain on my credit report?

Loan defaults are a serious NO-NO. It will adversely affect your credit score, and your credit report will reflect it for at least 8 years.

Why is the credit score from all credit bureaus different?

Every bureau has its distinct system of calculating a credit score, and thus every score is different.

Can I get approval on loans and credit cards with poor credit scores?

Approval will become very difficult if you have a low CIBIL score. While you may get approval, be prepared to avail of it at high-interest rates.

Is it possible to get an 850 credit score?

Yes, it is. Make sure to make loan repayments on time, have a long & good credit history, possess good financial stability, nd lower your credit utilisation ratio.

Who calculates my credit score?

In India, credit information bureaus such as Transunion CIBIL, Experian, Equifax, etc., are licensed by the RBI to determine credit scores.

Where can I check my credit score?

Register with information bureaus such as CIBIL and check your credit score once for free. However, subsequent report checks will require one to pay a certain fee.

Can I get a loan with a credit score of 650?

As 650 is not a good CIBIL score, expect high interest rates and non-negotiable terms & conditions from lenders.

How often is my credit score updated?

Anytime you close an old credit card, extend the maximum limit of your credit card, fail to pay an EMI on time, settle your loan or make too many credit inquiries, a credit information bureau will update your credit score.

Does checking my credit score frequently hurt it?

No, it does not.

How can I get a good credit score?

Pay EMIs on time, do not cross the maximum limit of your credit cards, do not make too many credit inquiries, diversify your credit profile, lower your credit utilisation ratio, and have a long & flawless credit history.

What is the difference between a credit report and a credit score?

A credit score is a three-digit number indicative of one’s repayment capabilities and creditworthiness. A credit report is a detailed report about an individual’s complete credit information and credit activities.

How long will it take to improve your credit score?

There’s no fixed timeline. It will take more time if you have a poor credit score.

After having closed all my past outstanding dues, will my credit score improve immediately?

Closing all your past dues will stop your score from dropping further. If you want it to improve, then take out a short-term loan and then repay the whole thing timely and consistently.

I have a CIBIL score of 692. Will it be difficult for me to get a loan?

692 is not a good score. While you may get approved for a loan, expect high interest rates and zero chances of any negotiation.

What can be the reasons behind a low CIBIL score?

There may be multiple reasons, including missed EMI payments and delays, loan defaults, high utilisation ratio, the closing of old credit accounts, too many hard inquiries, etc.

Can withdrawing cash against my credit card affect my CIBIL score?

Yes, it does. This indicates poor financial health and repayment abilities & will caution a financial institution about lending you credit.

One of my loan EMIs has been repeated twice in my CIBIL report. Can this be the reason behind the sudden dip in my CIBIL score?

If you find any fault in the credit rating agency, then be sure to rectify them before applying for a new loan or credit card.

I often miss my loan repayments because I forget the due date. Is there any way in which I can stop my CIBIL score from getting affected because of this?

Missed EMI payments affect CIBIL scores adversely, irrespective of the reasons behind so. If you miss payments for no purposeful fault, ask your lender to auto-debit amounts from your chosen bank account.

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