Are you anxious about whether your loan or credit card application will get approved? It’s completely understandable, considering the numerous factors that come into play. However, there’s one thing you can do to improve your chances – check your CIBIL score!
Your CIBIL score is the key factor that banks and financial institutions consider when evaluating your creditworthiness. The higher your score, the more likely you are to be approved for that loan or credit card you’re eyeing.
But what exactly is a CIBIL score and why does it matter so much? Let’s dive in and find out!
What is CIBIL Score?
A CIBIL score is a three-digit numerical representation of a person’s creditworthiness. It is a summary of a person’s credit history and financial behaviour and ranges from 300 to 900. The score is calculated based on various factors such as past credit history, repayment behaviour, credit utilization, types of credit used, and length of credit history, among others. The score is provided by the Credit Information Bureau (India) Limited (CIBIL) and is used by banks and lenders to assess an individual’s creditworthiness before approving a loan or credit card.
For example, let’s say Mr A wants to apply for a personal loan. The lender will first check his CIBIL score to determine whether he is creditworthy or not. Suppose Mr A’s CIBIL score is 800, which is considered a good score. In that case, the lender is more likely to approve his loan application as it indicates that he has a good credit history and is likely to repay the loan on time. On the other hand, if Mr A’s CIBIL score is low, say 500, the lender may reject his loan application as it suggests that he has a poor credit history and may default on the loan. Hence, maintaining a good CIBIL score is crucial for individuals to have access to credit facilities and financial services.
What is a Good CIBIL Score?
A good CIBIL score is a score that ranges between 750 and 900. A score of 750 or above is generally considered good, and it increases the chances of loan and credit card approvals. Lenders and banks prefer individuals with good credit scores as it indicates that they have a good credit history and are likely to repay the loan on time.
| CIBIL Score Range | Creditworthiness Explanation |
|---|---|
| Not Applicable/No History | User has no credit history or hasn’t used credit facilities yet. |
| 350-549 | Low CIBIL score suggests frequent defaults on credit card payments or loan EMIs. |
| 550-649 | Fair CIBIL score, indicating an attempt to improve creditworthiness by meeting deadlines. |
| 649-749 | Good CIBIL score suggests timely payments of loans and credit card bills. |
| 750-900 | Excellent CIBIL score, indicating a consistent track record of timely credit and loan payments. |
Why is it Important to Maintain CIBIL Score?
Maintaining a good CIBIL score is important because it can directly impact an individual’s ability to access credit facilities such as loans and credit cards. Lenders, including banks and financial institutions, often use the CIBIL score as a key parameter to evaluate an individual’s creditworthiness before approving any credit facility.
- Improved likelihood of getting approved for loans and credit cards.
- Higher possibility of obtaining loans and credit cards with lower interest rates from lenders and banks.
- Reduced risk of becoming a defaulter.
- Access to pre-approved loans.
- Potential discounts on processing fees and other charges related to credit facilities.
What Factors Affect CIBIL Score?
The CIBIL score is a reflection of a person’s creditworthiness and is based on four major factors, each with a different weightage. These factors are:
| Factor | Weightage |
|---|---|
| Payment History | 30% |
| Credit Utilization Ratio | 25% |
| Credit Type and Duration | 25% |
| Credit Inquiry | 20% |
Payment History (30% weightage)
Maintaining a good payment history is critical for maintaining a high credit score. Late payments or missed EMIs and credit card bill payments give the impression that the borrower is struggling to meet their deadlines and manage their credit health. Therefore, it is important to make timely payments on credit bills and loan amounts to maintain good credit health.
Credit Utilization Ratio (25% weightage)
The Credit Utilization Ratio (CUR) refers to the percentage of the total credit amount used by the borrower. Ideally, borrowers should not spend more than 30% of their total credit amount. If a borrower spends beyond this recommended limit, it negatively impacts their credit score, indicating that they rely heavily on credit and have a high dependence on it.
Credit Type and Duration (25% weightage)
Having a healthy mix of secured and unsecured loans demonstrates that a person has experience in handling different types of accounts. Secured loans require a security pledge in exchange for the loan amount, while unsecured loans do not. A long credit history with no payment defaults also makes one eligible for additional loans.
Credit Inquiry (20% weightage)
Credit inquiries refer to checks on a person’s credit history. A soft inquiry can be conducted by the user themselves, while a hard inquiry is conducted by banks or lenders to verify a person’s credit history. Multiple credit inquiries or requests result in a lower credit score, so it is recommended that borrowers refrain from making multiple credit inquiries.
What are the Types of Loans Impacting CIBIL Score?
Loans are divided into two categories based on the borrower’s obligation to provide security to the lender:
Secured Loans
Secured loans necessitate the borrower to provide collateral as a guarantee for the loan amount. Examples of secured loans include home, mortgage, vehicle, car title, and life insurance loans.
Unsecured Loans
Unsecured loans are not backed by any collateral, and borrowers are given these loans based on their credit score and other criteria. Examples of unsecured loans include consolidation loans, wedding loans, festival loans, home renovation loans, and top-up loans.
Both secured and unsecured loans have an impact on a borrower’s credit score based on their payment history and other factors. Having a good credit score and a strong financial history can increase the CIBIL Score, making it easier to obtain loan and credit card approvals.
How to Improve CIBIL Score?
Improving your CIBIL score requires a combination of responsible credit behavior and time. Here are some tips to improve your CIBIL score:
- Pay your bills and EMIs on time
- Keep your credit utilization ratio low (i.e., use no more than 30% of your available credit limit)
- Keep your credit card balances low
- Avoid applying for multiple loans or credit cards at the same time
- Maintain a healthy credit mix of secured and unsecured loans
- Check your credit report regularly for errors and dispute them if necessary
- Keep your credit accounts active by using them regularly but responsibly
- Limit your credit exposure by not having too many credit cards or loans
- Negotiate with your creditors to settle any outstanding debts or dues
- Seek professional credit counselling if you are struggling with debt management
