What is a CIBIL score, and how does it impact your creditworthiness
What is the CIBIL score?
Often, we hear people using “CIBIL SCORE” synonymously with “credit score”. It is a three digits number between 300-900, 900 being the highest and 300 being the lowest as a credit score.
CIBIL stands for CIBIL TransUnion limited. It is an Indian company that has access to all your financial transactions information whether you have borrowed money or repaid it. In India, CIBIL is the most trusted company for checking creditworthiness, and the score it gives is known as the CIBIL score.
Background of credit score in India
Reserve Bank of India (RBI) has licensed four companies in India to gather and access credit information. CIBIL started its operations in 2001 and has been one of the most trusted credit information companies in our country. The remaining three credit companies are Equifax, High Mark, and Experian. Every company has a different scoring system.
One similarity between all the companies is that they check your past credit history. Also, they provide a credit report based on which you are given a credit score.
Why is CIBIL score important?
Your credit score determines how reliable or risky you are as a borrower. It affects your ability to get a loan showcasing how eligible you are for a loan and how much interest you need to pay. Your credit score strongly affects your financial life and eligibility to get a personal loan.
Even a business has credit scores, showing how creditworthy a company is. It does also help in business to attract investments and stocks.
Why do lenders check your CIBIL score?
Any lender is bound to check your CIBIL score before approving your loan or credit card limit because of the following reasons :
1) To examine your past credit record
2) To decide whether you are eligible for a loan and credit card or not
3) To check whether you can repay the debts or not
4) To understand the level of risk involved in lending you the amount
5) To see the consistency in your credit balance
Debt to Income Ratio (DTI)
Usually, any lender does not allow people to take many debts, for instance, 35-40% of their income. This helps ensure that you can repay on time without being burdened by the debts.
Having outstanding debt is counted as bad news because it means you are taking too many credits, reducing your credit score. Also, it indicates to the lender that it can be difficult for you to repay the amount.
Factors affecting your CIBIL score
1) Your income level
2) Any existing debts that you have
3) Old credit payments
4) Any loan that had been rejected or cancelled
5) Any defaults, late payments or lapse in your past repayments
It is always essential to maintain your CIBIL score on the higher side. So, it is crucial to know the factors mentioned above to control them.
Steps to maintain your CIBIL score
You can maintain your CIBIL score by following these simple steps as mentioned :
1) Pay your EMIs without any delays or lapses to maintain a good record.
2) Pay your credit card bills on time. Set reminders and limits to ensure that.
3) Avoid keeping credit cards that you don’t use
4) Do not reapply for loans and credit cards you did not get approved before.
5) Avoid applying for too many loans in a short span of time.
6) Don’t increase your credit limit frequently
How can you improve your CIBIL score?
You can improve your CIBIL score by mentioned steps :
1) Ensure all your repayments are on time without delays.
2) Avoid taking too many debts in a short span of time.
3) Choose a short tenure for your loans and pay it with less rate of interest.
4) Consult a CA or financial planner.
5) Always negotiate the rate of interest
6) If you don’t have any credit history, borrow a personal loan or credit card and pay it on time to build a good credit score.
Benefits of having a High CIBIL score
1) Various rewards and deals on your credit card
2) You will get easy and quick approval for loans and credit cards
3) Low rate of interest on loans
4) Discounts on miscellaneous expenses while taking loans
5) High credit limits on your credit card
6) Less premium on insurances
7) Pre-approved loans
CIBIL score determines our creditworthiness and how easily we can borrow money or get credit cards with high credit limits. Each transaction impacts our CIBIL score, so it is imperative to maintain it at a good level.
Those who don’t have any credit history might have a -1 or 0 CIBIL score.
Maintaining a CIBIL score of 750 or more is always preferable to enjoying more credit products and benefits.
As discussed in the article, it is significant to check your CIBIL score and report because it shows where you stand as a creditor and what areas you need to work.
In 2017, RBI made it compulsory for all the credit bureaus in the country to issue one free credit report per calendar year. You can visit the website of CIBIL to check your credit score and report.
Checking the score regularly will also update you about any rectifications needed if the score has lowered without your fault.
Edited by Prakriti Arora