What is CIBIL Score and How It is Calculated?

In today’s financial market, a solid credit report is essential for anyone seeking a loan, credit card, or other financial product. One of the most important factors in these cases is the CIBIL score. But what is CIBIL, and why is it so important? In this article, we will examine what is a CIBIL score and discuss how to maintain a good score to ensure financial success.

What is CIBIL?

CIBIL full form in banking stands for Credit Information Bureau (India) Limited, the first credit information service provider set up fully in India. CIBIL plays a major role in collecting and maintaining records of individual and corporate credit activities including loans and credit cards These records are provided by banks and other financial institutions, for which CIBIL prepares Credit Information Reports (CIRs) and loan success.

What is CIBIL Score?

CIBIL score is a three-digit score between 300 and 900 which measures the creditworthiness of an individual. This score is derived from information available in an individual’s CIBIL report, which includes detailed information about their credit and loan repayment history. The higher the score, the better the person’s credit profile, indicating less risk to lenders. Scores above 750 are generally considered good, increasing the chances of loan approval.

How is the CIBIL Score Calculated?

The CIBIL score is calculated based on several factors, each contributing to the final score in a different way. These factors include:

Payment History

A record of on-time payments positively impacts your CIBIL score. Conversely, missed or late payments can score lower.

Credit Utilisation

This shows the ratio of available credit to total debt. Using a large percentage of your credit limit can indicate credit reliance, which will negatively affect your score.

Credit History Period

A longer credit history provides more information about your credit, which can positively affect your score.

Credit Mix

Having a mix of secured debt (such as a home loan) and unsecured debt (such as credit cards) can positively affect your score, as it determines your ability to manage debts

Why is CIBIL Score Important?

Here’s why it’s important to maintain a good CIBIL score:

Faster Loan Approval

A higher CIBIL score increases your chances of getting faster loan and credit card approvals. Lenders see you as a low-risk borrower, which leads to faster approval.

Low Interest Rates

A good CIBIL score usually allows you to reduce the interest rate on the loan, saving you money over the life of the loan.

Higher Credit Limit

With a higher score, you’re more likely to be offered a higher rate on your credit card, giving you more flexibility in spending.

Premium Credit Card Eligibility

A strong CIBIL score can qualify you for premium credit cards that offer good rewards, cash back, and other benefits.

Excellent Financial Health

A high CIBIL score is an indicator of good financial health, which means you manage your loans responsibly and make timely payments.

How to Check Your CIBIL Score?

It is important to monitor your CIBIL score to ensure that your financial position is stable. Here’s how you can do it:

Visit the Official Website of CIBIL.
Provide basic personal information, including your name, date of birth, and ID number.
Verify your identity through the OTP received on the registered number.
Check your CIBIL score and download your credit report.

Regularly monitoring your score allows you to see your financial situation and helps you make corrections if necessary.

How to Maintain a Good CIBIL Score?

Maintaining a good CIBIL score requires a proactive approach to managing your debt and financial obligations. Here are some ways to maintain or improve your score:

Prioritise Payments

Make sure you pay your EMI and credit card bills on time. Even a single missed payment can drag down your CIBIL score.

Monitor Credit Utilisation

Keep your credit utilisation ratio below 30%. This means you’re not overly reliant on debt and you’re keeping a close eye on your finances.

Limit Credit Inquiries

Stop applying for multiple loans or credit cards in a short amount of time. Each application requires a CIBIL score inquiry which can adversely affect your CIBIL score.

Clear Unpaid Debt

Pay your unpaid bills (if any) at the earliest. High outstanding debt affects the CIBIL score.

Avoid Credit Card Withdrawals

Withdrawing funds with your credit card can incur high interest rates and negatively affect your CIBIL score.

Diversify Your Credit Mix

Having a mix of secured and unsecured loans can positively affect your score, as it means you can manage debts responsibly.

Role of CIBIL in Loan Approval

CIBIL score is an important factor considered by lenders when deciding to approve a loan.

A good score not only increases the chances of approval but also allows for better credit terms, such as lower interest rates and higher loan amounts; on the other hand, a low CIBIL score can result in loan or credit card rejection.

Common Myths About CIBIL Scores

There are many misconceptions about CIBIL scores that need to be cleared up:

CIBIL Scores are Dependent on Income

A prevalent misconception is that higher earnings equals better CIBIL scores. Of truth, your income has no direct impact on your credit score; instead, your loan services do.

Checking Your Own CIBIL Score Lowers It

Some believe that checking your own CIBIL score counts as a hard inquiry. However, checking your score is a soft inquiry and does not impact your score.