What is CIBIL Score and Its Importance?

What is CIBIL score?
What is CIBIL score?

When applying for a loan or a credit card, a borrower’s main concern is whether or not his or her application will be approved. Considering the various factors that influence your loan/credit card application, your concern is understandable.

Before applying for a loan or a credit card, it is important to check the CIBIL score as the banks and financial institutions lends credit card/loan based on the CIBIL score of an individual. Remember, the higher your CIBIL score, the more likely your loan or credit card application will be approved.

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

What is CIBIL Score?

In layman’s terms, a CIBIL score is a three-digit numerical summary of a borrower’s financial history that ranges from 300 to 900. The CIBIL score is determined by the borrower’s previous loans, credit history, income, and financial situation. A credit score of 750 or higher is preferred by banks and lenders when it comes to providing credit cards and loans.

In short, the CIBIL score demonstrates the consumer’s creditworthiness. The higher the CIBIL score, the more likely it is that you will be approved for loans or credit cards.

Let’s assume Mr X wants to apply for a loan or a credit card. Lenders would consider his CIBIL score to be the most important factor while considering his application. His chances of getting approved for a loan and/or credit cards will maximise if he has a good CIBIL score.

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.

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

CIBIL Score RangeExplanation
Not Applicable/No HistoryThis indicates that the user has not used a credit card or taken any loan
350-549A low CIBIL score indicates that you frequently miss credit card payments or loan EMIs
550-649Fair CIBIL score; this means that the borrower is attempting to improve his or her score by meeting deadlines
649-749A good CIBIL score indicates that the borrower pays his or her loans and credit card bills on time
750-900Excellent CIBIL score, indicates that you have always been on time with credit and loan payments

Why is it Important to Maintain CIBIL Score?

Let’s look at a few factors that highlight the significance of maintaining a good 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

What Factors Affect CIBIL Score?

The CIBIL Score is calculated using four major factors, each with a different weightage. The following is a breakdown of the importance of each of these factors:

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

Users should make their monthly credit card payments and loan EMIs on time to maintain a high credit score. Delayed EMI and credit bill payments give the impression that the user is struggling to meet the deadline and maintain credit health. To avoid being in such a situation, it is preferable to maintain credit health by making timely payments on your credit bills and loan amount.

  • Credit Utilization Ratio

The Credit Utilization Ratio (CUR), is the amount used by the borrower out of the total credit amount provided by the bank. Borrowers are advised not to spend more than 30% of their total credit amount. If a borrower continues to spend more than the recommended limit, it will have a negative impact on his or her credit score. This is because spending too much on your credit card demonstrates that you rely heavily on it, displaying your dependence on credit.

  • Credit type and duration

The proper balance of secured and unsecured loans aids in credit score improvement. Secured loans require the borrower to pledge a security in exchange for the loan amount, whereas unsecured loans do not. Having a healthy mix of both types of loans demonstrates a person’s experience in handling various types of accounts. A long credit history with no payment defaults also qualifies one for additional loans.

  • 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, known as a soft inquiry, can be performed by the user himself. A hard inquiry occurs when a bank or lender conducts a credit inquiry to verify a user’s credit history. Making multiple credit inquiries or requests simply lowers the applicant’s credit score. As a result, it is advised that you refrain from performing multiple credit inquiries.

What are the Types of Loans Impacting CIBIL Score?

The types of loans that affect the CIBIL score are divided into two categories:

  • Secured Loans- Secured loans require the borrower to provide collateral in exchange for the loan amount. Home loans, mortgage loans, vehicle loans, car title loans, life insurance loans are a few examples of secured loans.
  • Unsecured Loans- Unsecured loans do not require the borrower to provide any security. Borrowers are offered these loans based on their credit score and a variety of other factors. Consolidation loans, wedding loans, festival loans, home renovation loans, top-up loans are examples of unsecured loans.

Both loans have an impact on a person’s credit score based on their credit history. Having a good credit score and a healthy financial history raises the CIBIL Score, which aids in loan and credit card approvals.

How Can I Check My CIBIL Score For Free Online?

Users can check their CIBIL score online using different financial mobile applications. Paytm is one such app that allows you to check your CIBIL score online for free using a simple process. Here are the steps you should take:

  • Log in to the Paytm mobile app.
  • Go to ‘Loans and Credit Cards.’
  • Select ‘Free Credit Score.’
  • You can check your credit score for free

Click Here to Check Cibil Score

How does CIBIL score impact loan and credit card eligibility?
The CIBIL Score is one of the most important factors considered by banks and lenders when granting loans and credit cards. A CIBIL score of 750 to 900 is considered excellent and indicates a higher likelihood 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?
The TransUnion CIBIL credit information company computes the CIBIL score. In 2012, a new version of the CIBIL Score called “CIBIL TransUnion Score 2.0” was released, offering detailed information highlighting the risk of lending credit in the changing Indian market. It enables lenders and banks to accurately score applicants and effectively measure risk.
How to know your CIBIL score?
You can check your CIBIL score by logging in to the CIBIL website or by using the Paytm app.
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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