What is CIBIL Score?
CIBIL stands for “Credit Information Bureau India Limited”. It is authorized credit agency by Reserve Bank of India that can calculate the credit score of an individual. The CIBIL basically, means measurement of your creditworthiness by assigning you with a CIBIL score.
What is meaning of CIBIL score and how it is determined?
CIBIL Score is a 3-digit numeric summary of your credit history, rating and report, and ranges from 300 to 900. The proximate your CIBIL score to 900, the better your credit score. Your CIBIL score is determined on factors such as your payment history, types of credit and number of loan accounts in your name, opening and outstanding loan amount, etc.
Importance of CIBIL Score.
Your CIBIL score is proof of your credit health. It gives the person offering loan an idea of your status and ability to repay the borrowed amount. When you apply for loan, the very first task that lenders do is check your CIBIL Score status and your creditworthiness.
If your CIBIL score is high, the chances of getting and acquiring loan gets strong. It marks as your first impression on lenders, the higher the score, the better your chances of loan being getting approved and sanctioned. You can also bargain on some fees or charges if the lender finds your credit score and income factors satisfactory.
But to the contrary, if your CIBIL score is low, you may get a loan, but your other income factors need to be adequate and good enough for the said purpose.
In typical circumstances, credit score of 700 is considered to be good and adequate.
To sum for importance and advantages of good CIBIL score, the following benefits are available to borrowers:
- Know your Credit Status.
- Makes you eligible for loans.
- Cheaper interest rates.
- Loans with longer tenure.
- Negotiation power.
- Discount on loan processing fees and other charges.
- Higher credit limit.
- Cards with better benefits and tons of rewards.
What factors will affect your CIBIL score?
Now, let us first have a look on what factors CIBIL score is made.
CIBIL score is made up of four important and main factors, viz.,
- Payment history- 30%.
- Credit exposure- 25%.
- Credit type and duration- 25%.
- Other factors- 20%.
Now, lets have a look at what will affect your and decline your CIBIL Score:
- Irresponsible Payment Behavior:-
Your credit score is, to large extent, a reflection of how promptly you repay your debts, or how frequently been repaid in the past. Any default in credit card or loan payments will reflect negatively on your credit score. The longer your bills and loan remains unpaid and greater the gap between bill payments, the harsher the impact on your credit score. As per CIBIL analysis, a 30 day gap in repayment can reduce your score by 100 points. Any missed or overdue payments reflect poorly and badly on your score and gives impression that you are not consistent enough with repaying the credit borrowed.
- Length of Credit Record:-
The span of your credit record generates a clear insight into your financial health. It basically means that you have been in credit system for some significant period, which in turn allows the lender to better scale your credit management skills. It is not favorable on the part of lenders to ascertain your repayment behavior in absence of significant credit period, and they are likely to turn away from such uncertain situations.
- Credit Utilization Ratio:-
The Credit Utilization Ratio is the amount of credit you use from the total credit limit you have put together. It tells you about your credit limit and how much you have use till now. The less credit you use, the better the score. Consistently displaying your inability to reorganize your spending habits as per your means can be detrimental to your credit score. It is advisable to maintain the credit utilization ratio below 30%. When this ratio is too high, it also brings fore questions around your ability to repay the borrowed amount.
- Credit Mix:-
It is mix of credit accounts against your loan portfolio, and the credit score is greatly influenced by the same. It normally includes the number of secured and unsecured credit lines against your name. It is important to have a balance between secured and unsecured loans. If you have high number of only one type of loan, it will affect your score. If you have maintained a healthy balance between both of them, it will suggest that you have proper experience in handling both types of loans.
- Multiple credit applications:-
When you apply for loan or credit card, lenders will check your creditworthiness by pulling pout your credit report. This is called as hard inquiry. If you send out multiple applications, in turn it will mean that multiple inquiries are occurring around same time in your name. these hard inquiries are reported and will affect our credit score negatively. It will make you look as if you are credit hungry.
- Length of the credit history:-
In vague terms credit history means the total number of years that have passed since you have first opened your credit account. If you have long credit history it helps lenders take sound decision at the time of offering the credit.
- Outstanding debts:-
It is always advised to clear off your loan and not keep any outstanding debts. When unpaid dues are reflected on your account and on credit report, it will take toll on your credit score.
- Paying only minimum amount due:-
If you continue to pay only minimum amount due on your principal each month then your debt trap increases. It also leads to increase in compound interest. So, it advisable to pay your credit card bills in full, or otherwise it will reflect your poor payment behavior.
Having a good credit score will help you to remain in good books of banks and lenders, and they would come to you with great offers that you wouldn’t get offered if your credit score is less than required. Its like a gold standard of the credit system and you have to have a excellent one at it.