In today’s time it is easy for anyone to achieve their material and financial goals, thanks largely to the availability of easy credit in the market. But not everyone can get their hands on this credit as easily because one has to have certain credibility in the eyes of the banks before they extend loans to you. One of these factors is the CIBIL Score.
So, what is a Cibil score?
A CIBIL Score is basically a customer’s credit score. It is a three-digit numeric summary of a consumer’s credit history and reflects the person’s credit profile. This is based on the person’s past credit behavior, such as borrowing and repayment habits as shared by banks and lenders with CIBIL on a regular basis.
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The score is based on details found in the ‘Accounts’ and ‘Enquiries’ sections of the CIBIL Report, including (but not restricted to) loan accounts or credit cards, payment statuses, outstanding amounts and days past the due date. Ranging from 300 to 900, the closer a CIBIL Score is to 900, the higher are the chances of the consumer’s credit card or loan application getting approved.
While examining anyone’s CIBIL score a person’s past behavior is taken as an indicator of his/her future actions, and, in line with that, the CIBIL Score showcases a consumer’s credit-worthiness. For example, when a person applies for a credit card or loan, one of the important factors that lenders check is the credit profile of the person as depicted by the CIBIL Score.
What is a CIBIL Report?
A CIBIL Report is a consolidated credit report that includes the consumer’s CIBIL Score and credit summary, personal information, contact information, employment information, and loan account information. It is important to note that lenders consider both the CIBIL Score and Report to assess a person’s loan eligibility.
What are the factors that impact a CIBIL Score?
The CIBIL Score is generated by a scoring algorithm, which takes into account a large number of data points and macro-level credit trends. It is based on 36 months of credit history. Primarily, there are four key factors that impact a consumer’s CIBIL Score – payment history, credit mix of secured or unsecured loans, enquiries and credit utilisation. However, the latest CIBIL Score algorithm also includes the depth of credit (that is, the duration of your existing credit history from when your oldest credit account was opened), long term trend of outstanding balances, transaction history on credit cards, ratio of actual repayment amount to total amount due and new accounts opened/accounts closed.
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How can you work towards a positive credit profile?
Your CIBIL Score is built on your credit history and past payments but will impact your future access to credit. What you do today can help you build a stronger and healthier credit profile. Here’s how:
- Always pay your dues on time as lenders view late payments negatively.
- Keep your balances low, do not use too much credit, and control your utilisation. And apply for new credit in moderation.
- Maintain a healthy credit mix of secured (like home loan and auto loan) and unsecured loans (like personal loan and credit cards) – too many unsecured loans may be viewed negatively.
- Monitor your co-signed, guaranteed and joint accounts monthly. Remember that you are held equally liable for missed payments in co-signed, guaranteed or jointly held accounts, and your joint holder’s (or the guaranteed individual’s) negligence could affect your ability to access credit when you need it.
- Review your credit history frequently throughout the year. Monitor your CIBIL Score and Report regularly to avoid unpleasant surprises (like a rejected loan application). Checking your report regularly will also alert you to possible inaccuracies, if any. In case you spot any discrepancy, you can log a dispute on the CIBIL website or request the lender to report the correction to CIBIL.
So, your Cibil score shows your credit history and is used by lending institutions to evaluate your creditworthiness before approving loans and credit-based financial products.
Cibil scores are calculated by lenders by taking into account factors like your payment history, length of payment history, application for credit, the debt amount, credit mix etc. need it.
Cibil scores range from 300 and go up to 900. For example a score between 300 and 549 is considered poor, while a score between 550 to 700 is considered to be average. Anything above that is considered to be good. Therefore, if your credit scores are on the higher side it will enable you to access loans more easily.
If you want access to personal loan then a credit score of 700 and above is required. Anything below that will make it all the more harder for you to get access to loans. But the good thing is that one can improve your Cibil score by following these steps:
- Repay credit card dues on time: It prevents your interest rates from rising and helps in improving your credit score.
- Limit credit utilisation: Use less than 30 percent of your credit card limit to prevent damage to your credit score. It is advisable to opt for higher credit limit which can help improve your credit score fast.
- Limit the number of new credit cards: Having a large number or credit cards and making high value purchases can be counterproductive. While applying for a credit card check your credit eligibility and apply to banks where chances of your loan application getting approved in higher.
- Keep a check on your credit report: It is important to keep a check on your credit report from time to time to check for inconsistencies and errors which can adversely affect your credit score.
- Opt for different types of credit: Make a mix of credits in your portfolio, including personal and secured loans, long and short-term loans to improve your credit history.
- Increase your credit limits: It will immediately lower your credit utilisation ratio and improve your credit score. When your over utilise your credit limits it makes you a high-risk borrower, thus increasing the risk of default. Hence you should increase you credit limit before you go ahead with additional spending.
- Keep old debt on your report: Keep all records of your good old loan account in your credit report. It will help improve your creditworthiness and has a positive impact on your loan application.
- Never apply for multiple new credit lines: Every new application for a new credit line brings closer scrutiny of your credit report. It also highlights how much risk you possess as a borrower.
Improving your CIBIL score can appear to be an uphill task but can be achieved through proper planning and some discipline.
