Demystifying the CIBIL Score: What You Need to Know

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Demystifying the CIBIL Score: What You Need to Know

The lending industry is governed by stringent checks and measures, aimed at safeguarding the interests of both lenders and borrowers. Among them, the foremost parameter that lending institutions evaluate during loan processing is the applicant’s CIBIL score or credit score. It acts as a numerical report card of their monetary health, depicting their financial habits and credit reliability. 

Read on as we demystify the various facets of this three-digit numeral so that you may ascertain everything about CIBIL scores and use them to your advantage for securing ideal credit deals. 

CIBIL Score Calculation

The Reserve Bank of India has authorised four credit information companies in the country – Experian, Equifax, Highmark and TransUnion CIBIL – to manage the credit data of both individuals and organisations. 

These credit bureaus store records of all credit transactions received from different banks and lending institutions such as your loan history, credit usage, repayments, etc. Based on this information, they generate credit reports assigning each one a particular number between 300 to 900, referred to as the credit score. The reports issued by CIBIL are known as CIBIL reports while the corresponding score is called the CIBIL score. 

What Is a Good CIBIL Score? 

Higher credit scores closer to 900 represent well-managed credit behaviour and repayment patterns. Hence, applicants with a good CIBIL score i.e. 750 or above usually receive preferential interest rates and terms as lenders have more faith in their repayment potential.

Your CIBIL report may contain the following range of scores:

CIBIL Score Range

Credit Rating

Ease of Availing Credit 

300 to 549 Low Very low. High-risk borrower: irregular payments, probable defaults and excess credit usage
550 to 649 Fair Average. Erratic repayment history; some lenders may offer credit at increased interest rates
650 to 749 Good High. Fairly regular repayments and lengthy credit history; lenders may extend favourable deals, but not the best ones 
750 to 900 Excellent Very high. Exemplary credit record; assured of lowest interest rates and preferred terms and conditions 


How Does CIBIL Determine Your Credit Score? 

Although credit bureaus may employ different methodologies when computing credit scores, the key variables normally comprise:

Payment History: 30% of Your CIBIL Score

On-time EMI or credit payments add significantly to your credit rating. At the same time, late payments and defaults will fetch you minus points since this implies problems in managing one’s finances.

Credit Usage: 25% of Your CIBIL Score

Credit borrowers should ideally spend up to 30% of their available credit. Approaching the limit indicates living beyond one’s means. 

Fresh Credit: 20% of Your CIBIL Score

If you apply for multiple credit cards or loans in quick succession, it may cast aspersions on your ability to handle funds, weakening your score. 

Lengthy Credit History: 15% of Your CIBIL Score

Your credit rating may increase if you retain older credit accounts with timely repayments as it validates responsible credit management.

Credit Type: 10% of Your CIBIL Score

Having a balanced variety of credit such as credit cards, long-term loans and short-term loans can score valuable brownie points. For instance, if you have a higher quantum of unsecured loans (credit cards, personal loans, etc.) as compared to secured loans (house or car loans), your credit rating might drop.

Advantages of a Good CIBIL Score

A high CIBIL rating ensures enticing deals and negotiating leverage as elucidated below: 

Lower Interest Rates

Favourable CIBIL scores can place you in a better position to bargain for cost-effective borrowing rates. This could be a bonus for long-term loans such as a home loan because reduced housing loan interest rates may result in considerable savings over time.

Quicker Loan Approval

Your loan application will sail smoothly if you possess a good credit rating. Conversely, a lower score could result in loan denial. However, if accepted, such borrowers may need to comply with harsher rates and terms.

Accelerated Disbursement

A strong score accords the dual benefit of hastening the loan approval and disbursement processes. Thus, you can readily obtain funds for any sudden requirement such as unexpected medical bills, education fees and so on.

Summing Up

Each lending institution may have varied eligibility norms, including the minimum credit score requirement. If you wish to take a housing loan, verify these details in advance. Moreover, in case you fall short of the requisite CIBIL score, implement immediate remedial measures to enhance it. Once your score improves, you can then proceed with the application process and enjoy attractive loan deals.  

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