The Ultimate Guide to Understanding Credit Score or CIBIL Score
If you have ever enquired about availing any loan or credit, you must have come across the terms-Credit score or CIBIL score. Complicated they may seem but let’s demystify these scores and credit at length.
What is Credit Score/CIBIL Score?
In simple terms, this is a 3-digit score given to you, after studying your debt repayment behaviour. There are 4 credit bureaus in India, Credit Information Bureau India Limited (CIBIL), Equifax, CRIF High Mark and Experian which have your loan and payment history database and they each give you the credit score. CIBIL is the most common credit bureau in India and synonymous with credit score.
How Can You Check Your CIBIL Score?
You can check your credit score directly from CIBIL website or the websites of other three credit bureaus. As per RBI guidelines, these credit bureaus are mandated to provide an individual his/her free credit score once a year. Know more about the steps to access your CIBIL score here. Bear in mind that you are allowed only one free enquiry about your credit score, so if you wish to check your credit or CIBIL score more than once in the same year, you can opt for the paid subscription plan on the CIBIL website.
What is a CIBIL Report?
All your credit-related transactions and loan approvals are reported to the credit bureaus by your loan lenders like banks, NBFCs or credit card companies. Every time you apply for a home loan, car loan, bank credit cards or credit with any bank or financial institution, they can request and access your credit report to determine your loan eligibility. Your credit report that is prepared and maintained by CIBIL and other bureaus, documents your payment history and your credit health over a significant period including any missed or late payments.
You can apply for your credit report online as well as offline. Unlike your credit score, you would need to pay for this. Your credit report contains several sections starting with personal information, to account details, enquiry details and various other terms. You can learn more about understanding your CIBIL report and how to improve CIBIL score on MoneyTap’s blog section .
How is CIBIL Score Calculated?
As per Reserve Bank of India’s instructions, every bank or financial institution is supposed to report an individual’s financial data monthly to the credit information bureaus of India.
Once they report your data to the credit information bureaus, different bureaus use their own algorithm to calculate your credit score. Since they check your CIBIL score based on the same data, your score will be similar, irrespective of the credit bureau.
What is the Difference Between Credit Score, Credit Report and Credit Rating?
These terms are very closely related and it is easy to get confused. The following points should help you differentiate between them. Besides these, there is another related term called vantage score which is a credit scoring method.
What is a Good Credit Score?
Any score greater than 750 is a good credit score. In other words, a score between 750 and 900 is what you should aim for. It indicates that you have been regular with your payments, and banks and financial institutions find you creditworthy. With a score of 750 and above, you are considered credit healthy by banks and other NBFC’s and this good score can bring your several benefits. A good credit score will not only help you in getting approved for loans, but additionally will help you with a higher loan amount, lower interest rates, a longer repayment period, etc.
What is a Bad Credit Score?
Any score less than 650 is a bad credit score. To break it down further let’s look at some ranges. 580 – 650 is considered low on the credit scored scale. A score between 500 – 579 is considered poor and below that from 300 to 499 is considered to be a bad credit score. Low, poor and bad credit scores often disqualifies you from getting a loan approval as this indicates a bad credit history and tells banks that you have had a history of not paying your bills in a timely manner, not paying complete amounts, or have a bad borrowing history. If you are approved for a loan with low to bad credit score, the interests rates you get could be quite shocking.
How to Improve and Maintain
Your CIBIL Score?
If you happen to have a low CIBIL score or bad payment history, all is not lost. The good news is that this record doesn’t stay on your credit profiles forever. You can still repair your credit history and improve your credit score. Also, if you happen to have a good CIBIL score, you need to maintain it. Just follow the following tips to get on the path to better credit health:
- Make your payments on time.
- Check your credit report for errors.
- Limit your credit utilization ratio.
- Avoid multiple loan or credit card applications.
- Try not to exceed 30% of your available credit.
- Take help of some apps to manage your credit score.
What are the Factors that Affect
Your CIBIL Score?
Your payment history forms a major part of your CIBIL score. Additionally, the following factors also influence your credit score:
Timely payment of your credit cards and loans is a big factor on what your CIBIL score will be. Keeping a track of payments in case you have multiple credit cards can get difficult at time but it is very important that you do. Make sure to makeyour payments on time to assure the lenders that you are financially responsible, and that they can recover their money.
Incidences like a written off loan, foreclosure, filing for bankruptcy, account in collection due to default in payments adversely affect your CIBIL score immediately. This warns your potential lender that you are unable to handle your finances for which they might face difficulty in recovering their money.
Debt to Income Ratio:
Keep your debts such as credit card bills and mortgages lower than 50% of your income to improve your credit score. A higher ratio pulls down your credit score.
The Frequency of Hard Enquiries:
Hard enquiries are the credit report enquiries made by a potential lender. Every time you apply for a loan like a home loan or car loan, the bank asks for your credit report from CIBIL which adversely affects your score. Hence, you should avoid multiple applications for loans or credit cards.
Length of Credit History:
Having a long credit history gives the potential lender a better understanding and confidence in your financial capability. If you have a short credit history or no credit history, it doesn’t tell the lender much about you. Avoid closing a long-standing credit card to maintain a long credit history.
Sometimes it is possible that there are reporting errors about your account. You need to check your credit report once every year to check for such errors and fix them.
What are the Benefits of a Good CIBIL Score?
A good credit score will fetch you better credit cards with higher limits and better deals.
Higher chances of getting a home loan, car loan or personal loan. Since banks are assured of your financial behaviour and credit worthiness, they won’t reject your loan on this account at least.
A good CIBIL score can help you negotiate or get a lower rate of interest on your loans.
You can bargain better and do away with extra expenses like processing fee etc. on your loan application if your credit or CIBIL score is good.
CIBIL Score and Personal Loans
Personal loans are unsecured loans. Unlike home loans or car loans, they don’t have anything as security against the loan. Hence your CIBIL score plays the most important role here. A score above 750 has a better chance of loan approval as it gives the lender an assurance that you will pay on time. This may also help you get better interest rates on personal loans which generally have a higher rate of interest when compared to secured loans. Sometimes, banks may still reject your loan pplication despite having an excellent CIBIL score for different reasons, so make sure you are aware of that.
CIBIL Score and Credit Cards
Banks check your CIBIL score to ascertain your financial behaviour, loans and credit pattern. A good credit score above 700 will help you get a credit card approval. However, compared to personal loans, you may still get a credit card with a low CIBIL score. But it plays a crucial role when it comes to the type of card being offered and the credit limit and terms and condition of the card.
Making sure that your credit or CIBIL score is as high as you can get it is very essential nowadays. It is your financial health identity and the higher it is, the better your chances of lenders approving you when you need financial help in the form of loans or credit cards.