Everything You Need to Know About the CIBIL Score
CIBIL is the abbreviated form of Credit Information Bureau (India) Limited which is India’s first credit bureau or credit information company.
A credit score is a numerical expression which is based on the analysis of an individual’s credit files. It represents the creditworthiness of an individual and is primarily based on credit report information, which is typically sourced from credit bureaus like CIBIL.
The scores are given by banks and credit card, or loan granting companies for evaluating the potential risk of lending money to consumers and defining measures to minimize losses due to bad debt.
What Is CIBIL?
In India, CIBIL has been functioning as a credit information company since 2001. In 2010, three other organizations, Highmark, Experian and Equifax were given licenses by the Reserve Bank of India for operating as credit information companies, but CIBIL remains the most popular one.
Founded in 2000, CIBIL aims to bring greater efficiency and transparency to the credit space. TransUnion International (a global credit bureau) and Dun and Bradstreet (a global provider of credit information) are technical partners of CIBIL in India.
The mission of CIBIL is “To catalyze the growth of Credit in India through solutions that enable well-informed credit decisions; technology that enables superior information availability; and people that provide high-quality services.”
Following Are the Shareholders in CIBIL:
- ICICI
- SBI
- IOB
- HSBC
- Bank of Baroda
- Bank of India
- Union Bank of India
Area of Focus
- Commercial Bureau dealing with records of companies and institutions
- Consumer Bureau dealing with consumer credit records
What Is a CIBIL Score?
CIBIL Transunion Score is a 3 digit number ranging from 300 to 900 representing an individual’s credit history. The score is calculated on the basis of the credit report which consists of the credit history.
The CIBIL score ranges between 300 and 900. A high score represents a good credit history thus closer the score to 900, the better it is. A score close to 300 represents a poor credit history which may lead to a rejection of the loan applied.
Credit score plays a critical role in the loan and credit card approval process. It is the first screening criterion applied by banks and other financial institutions when reviewing the loan or credit card application.
Benefits of a Good Credit Score
1. Loan Sanctioning:
CIBIL score gives information to the lender about the borrower’s creditworthiness. Thus, the CIBIL score is a preliminary step in the process of getting a loan.
Only after being satisfied with the credit score of an individual, does the lender proceed with further applications for approval.
So, maintaining a good credit score and other factors like repayment capabilities will gain the lender confidence for loan approval, while a poor score may lead to rejection.
2. Faster Disbursements of Loan:
A good credit score will enable to get a loan approval faster, which will enable faster disbursement of loans.
Faster availability will enable the individual to use the loan amount quicker for the required purpose.
3. Lower Interest Rates:
A good CIBIL score will enable the individual to have more lender options. A good score will provide the negotiating power to get the best interest rates in cases of car loans, personal loans and home loans, where interest rates vary across different lenders.
Score Calculation
The following factors are considered by the organization while calculating the CIBIL score:
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Credit History
The banks and financial institutions send personal and credit information to the credit bureaus which then collate all the information into a credit report and calculate a credit score.
The credit bureau has a month-on-month record of the latest 3 years of your payment towards the bills and EMIs.Any default or delay in payment of EMI’s will affect the credit score as the credit report has the status of each account outstanding or settled.
Credit history has 30% weightage in the calculation of the CIBIL score.
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Credit Utilization
Credit utilization percentage is how much is being owed to the lenders as a percentage of how much loan an individual can take.
The credit limit and the amount of loan taken on it is used for calculating the credit utilization. Increasing credit utilization over time is seen negatively by the credit bureaus, because it depicts the rising burden of a person’s loan over time, giving a negative view to the credit bureau.
Credit Utilization has a weightage of 25% while calculating the credit score.
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Credit Mix and Duration
The composition of the loan portfolio also impacts the CIBIL score and it depends upon how many secured and unsecured loan is present in the loan portfolio.
A higher weight of unsecured loan leads to a lower score, compared to a person who has never taken any unsecured loan. On the other side, a secured loan in the portfolio has a positive impact on the credit score.
Credit Mix and Duration has a weightage of 25% on the CIBIL score.
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Other Factors
Other factors such as the number of credit applications made in the past, etc. impact the credit score. The higher the number of credit applications more the negative impression is created. These factors account for the remaining 20% weightage of the CIBIL score.
Checking For Credit Score
According to the RBI guidelines, the four credit bureaus in India: CIBIL, CRIF High Mark, Equifax, and Experian have to mandatorily provide a free credit score once a year to individuals.
Interested people can visit the bureaus and request their credit score through postal or online services. However, the individuals may be asked to furnish certain documents for verification and only after proper authentication can the credit report be mailed.
You may also want to read Best Ways to Help Your Improve Your CIBIL or Credit Score
What Is a Good CIBIL Score?
A CIBIL score of 750 or above is considered good. Better the credit history, the better will be the score. The lender looks for a 750 credit score for easier processing and approval of loans.
CIBIL collects data like the history of loans, credit cards, total available credit balance and the duration of the loan while assessing the credibility and assigning the credit score.
Improving Credit Score
A person should aim to improve his/her credit score by following certain points:
- Keeping the credit balance low
- Applying for new cards after cancelling the old ones
- Maintaining the credit utilization ratio
- Limiting the credit card spending to less than 50% of the limit available
- Checking the credit score with the bureau and ensuring necessary steps for improvement after analyzing the report
Mistakes You Should Avoid
The following mistakes must be avoided to ensure that you maintain a good credit score:
- Having too many unsecured loans in the loan portfolio
- Delaying or missing credit card or EMI payments
- Making multiple or unnecessary loan applications
- Spending too much on the credit card limit, when it is not required
Conclusion
An individual can borrow for purposes like education, home, marriage and other things. Maintaining a good credit score will enable an individual to obtain a loan easily.
Organizations like CIBIL provide credit scores which a person should regularly check. They may improve their credit scores by following the above tips if the score is below average.
Happy investing!