CIBIL Score and Its Importance: All You Need to Know

While applying for a loan or a credit card, the major concern in a borrower’s mind is whether or not his/her application would be approved. Considering the various factors that affect your loan/credit card application, the concern is justified.

To relax yourself a bit, you can check your CIBIL score before you apply for a loan or a credit card. Simply remember, higher the CIBIL score, higher will be the chances of getting your loan/credit card application approved.

But what is CIBIL score and why is it so important?
Let’s find out!

What is CIBIL Score?

In simple terms, CIBIL score refers to a consumer’s credit score. It is a 3-digit numeric summary of a borrower’s financial history, that lies between 300-900. The CIBIL score is calculated on the basis of the borrower’s previous loans, credit history, income, and financial wellbeing. A credit score, over 750 is considered preferable by banks and lenders for providing credit cards and loans.

In short, the CIBIL score showcases the creditworthiness of the consumer. The higher the CIBIL score is, the more will be the chances of getting approved for loans or credit cards.

For example- Suppose Mr. X wants to apply for a loan or a credit card. While considering his application, his CIBIL score would be considered the top-most factor by the lenders. If he has a good CIBIL score, his chances of getting approved for a loan and/or credit cards will increase.

What is a Good CIBIL Score?

A good CIBIL score which is near to 900 is considered favourable by banks and lenders for loan and credit card processing. A user becomes eligible for a loan or credit card if his/her CIBIL score is 750 or more.

Read More: Can I Get a Loan With a Credit Score of 550

Here are the CIBIL scores and their implications showcasing the creditworthiness of a user-

CIBIL Score RangeExplanation
Not Applicable/No HistoryThis means that a user has not used any credit card or taken any loan
350-549Bad CIBIL Score; meaning that you often delay your credit payments or EMIs against loans
550-649Fair CIBIL score; meaning that the borrower is trying to improve his/her score by meeting the deadlines
649-749Good CIBIL score; meaning that the borrower makes timely payment of the loans and credit card bills
750-900Excellent CIBIL score; meaning that you have always been regular in paying credit and loan amounts

Why is it Important to Maintain CIBIL Score?

The CIBIL score is the most important factor to be considered in the process of a loan or credit card approval. However, this is not just the only benefit of having a good CIBIL score. Let’s take a look at multiple other factors that highlight the importance of maintaining the CIBIL score-

  • Higher chances of loan and credit card approval
  • Chances of receiving a lower rate of interest from lenders and banks
  • Fewer chances of turning into a defaulter
  • Pre-approved loans access
  • Discounts on processing fees and other charges
Read More: Increase your Credit Score- 9 Best Practices to Follow

What Factors Affect CIBIL Score?

CIBIL Score is calculated on the basis of 4 major factors, each having a different weightage. Here is how the breakdown of the importance of each of these factors looks like-

Payment History30%
Credit Exposure25%
Credit Type and Duration25%
Other Factors20%
  • Payment history

For maintaining a high credit score, users should make their monthly credit card payments and loan EMIs on time. Delayed payments of EMIs and credit bills are seen as though the user is struggling to meet the deadline and maintain credit health. Thus, in order to avoid landing into such a situation, it is better to maintain credit health by making timely payments of your credit bills and loan amount.

  • Credit Utilization Ratio

The amount used by the borrower, out of the total credit amount provided by the bank is known as the Credit Utilization Ratio or CUR. It is advised that borrowers spend not more than 30% of their total credit amount. If a borrower still spends more than the advised limit, it will leave a negative impact on his/her credit score.This is because spending too much on your credit card shows that you rely heavily on it, thereby depicting your dependency on credit which hampers your creditworthiness.

  • Credit type and duration

The right balance between secured and unsecured loans helps in improving the credit score. Secured loans are the ones in which the borrower needs to pledge a security in exchange for the loan amount, whereas unsecured loans are the ones in which no such security is required. Having a healthy mix of both these types of loans shows a person’s experience in handling various types of accounts. Also, a long credit history with no payment defaults makes one eligible for getting loans further.

  • Credit inquiry

Another factor affecting the CIBIL score is the credit inquiry. A credit inquiry refers to a check on the user’s credit history. This credit check can be made by the user himself, which is known as the soft inquiry. When a bank or a lender makes a credit inquiry to verify the credit history of a user, it is known as a hard inquiry. Making multiple credit inquiries or requests simply brings down the credit score of the applicant. Hence, it is advised that you resist yourself from performing multiple credit inquiries.

What are the Types of Loans Impacting CIBIL Score?

The types of loans that impact the CIBIL score are basically divided into 2 categories-

  • Secured Loans- Secured loans are the ones in which the borrower is bound to submit security in exchange for the loan amount. Secured loans include home loans, mortgage loans, vehicle loans, car title loans, life insurance loans, etc.
  • Unsecured Loans- Unsecured loans are the ones that do not require the borrower to submit any security. These loans are offered to the borrowers on the basis of their credit score and various other factors. Unsecured loans include consolidation loans, wedding loans, festival loans, home renovation loans, the top-up loan, etc

Both these types of loans affect the credit score of a person as per their credit history. Having a good credit score and a healthy financial history increases the CIBIL Score and thus helps a person in getting loan and credit card approvals.

How to Check The CIBIL Score Online for free?

Various financial mobile applications allow users to check their CIBIL score online. Paytm is one such application that offers the option of checking the CIBIL score online, through a simple process for free. Here are the steps that you should follow-

  • Visit Paytm application
  • Go to the ‘Featured’ section
  • Check on ‘See all’
  • Click on ‘Free credit score’
  • Enter the required details like PAN number and DOB
  • If you are a new user, you will get an OTP before for profile verification
  • After entering the OTP (if required), click on ‘ Check Credit Score’
  • Your credit score will be displayed on the next screen that appears

FAQs
How can I improve my CIBIL Score?
To improve your CIBIL score, you must follow the following steps-
  • Ensure that you pay the credit card amount and loan EMIs on time
  • Maintain a credit mix of both secured and unsecured loans
  • Limit your credit utilization to 30% out of the total credit limit provided
  • You can also connect with the banks to increase your credit limit
  • Restrict too many credit/loan application inquiries within a short duration of time
  • Restrain from settling down the debts instead of paying them timely. Settling the amount definitely reduces the debt burden however it shows the inability of the person to repay the debt
How does CIBIL score impact loan and credit card eligibility?
CIBIL Score is one of the most important factors taken into account by banks and lenders for providing loans and credit cards. A CIBIL score between 750 and 900 is considered the best and implies higher chances of credit or loan approval.
What is the minimum CIBIL score for acquiring a loan?
Minimum CIBIL Score for acquiring loan ranges from 720-750. A person lying between this range highlights his/her creditworthiness which impacts the approval of a loan or credit card application positively.
What is CIBIL TransUnion score 2.0?
CIBIL score is calculated by the TransUnion CIBIL credit information company. In the year 2012, a fresh version of the CIBIL Score called “CIBIL TransUnion Score 2.0” was launched, which offered detailed information highlighting the risk of lending credit as per the changing Indian market. It helps lenders and banks score the applicant with accuracy and measure the risk in an effective manner.
How is the CIBIL score calculated?
CIBIL score is calculated through its own proprietary algorithm, however, the exact factor through which the score is calculated is not disclosed. Meanwhile, here are a few factors that matter the most when it comes to calculating CIBIL Score-
  • Payment History
  • Credit Mix
  • Credit History Duration
  • Hard Inquiries
  • Card Utilization Ratio
How to know your CIBIL score?
You can log in to the official website of CIBIL or can go to the Paytm application for checking the CIBIL score.
Is there any difference between CIBIL Score and CIBIL report?
CIBIL report, also called Credit Information Report is a detailed document mentioning the user’s borrowing and repayment history. The CIBIL score or rating, thus derives from the detailed report along with other variables.
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