CIBIL (Credit Information Bureau of India Limited) is one of the most trusted credit information and rating companies. It is in fact, the first Credit Information Company of India. CIBIL collects monthly reports from financial institutions and banks to cull out loan and credit card payment information about individuals. The report generated using all these details is also known as the Credit Information Report (CIR). The CIR helps generate a Credit Score; a unit used to evaluate an individual’s credit worthiness by loan providers.
The CIBIL objectifies making available financial information for lenders and borrowers. This overview of the financial records is used to generate a credit rating. This information helps lenders to gauge the creditworthiness of applicants opting for a debt. The Reserve Bank of India has prepared guidelines on the basis of which CIBIL operates. These guidelines assist the lenders to be decisive about approving or rejecting a loan application based on the various parameters. New age Employers have also started considering every candidate's CIBIL score in order to determine the financial stability of potential employees.
What is a CIBIL Score?
CIBIL Score is a statistically derived three-digit number that is calculated by the bureau, and it defines your credit history. Loan providers, credit card companies, and banks rely heavily on this score when deciding on whether to extend a loan or credit card.
It indicates the credit risk or probability in providing a loan to a specific borrower. So, what is a good credit score? The score ranges from 300–900; a score of 700+ is considered a healthy credit score, However, the basic criteria is decided by each lender. Higher the CIBIL score, higher is the probability of getting a loan at a reasonable rate of interest.
How is the CIBIL Score calculated?
Considering that the CIBIL score is critical for loan approval and clearly determines the credit worthiness of a borrower, it is important to understand how it is calculated. A lot of advanced analytics and proprietary algorithms are involved in the calculation of the CIBIL score and being aware of the elements that go into this calculation is helpful. These include: how much credit you are using up (e.g., credit utilization on your credit card), delinquency or late payment (repayment behavior), and types of credit you have availed (only credit cards or a balanced mix of credit lines).
What are the key components of a Credit Score Report?
Past Performance or Payment History:
This aspect has the most impact on the calculation of your credit score. It highlights whether the risk involved in extending a loan to a borrower could be high, low or medium. This analysis is based on the past financial performance and records. Credit and rating companies like CIBIL use the payment history on your credit card, loan, mortgage, and other debts to classify your risk level.
Naturally, regular payments translate into a better score. The obvious logic is that when you make your payments on time on a consistent basis, your credit score remains healthy. On the contrary, if you regularly default on payments your credit rating is going to be lower.
Credit Utilization or Credit Exposure:
Every borrower is eligible for a certain amount of loan depending on his or her credit records. However, the amount of credit that a borrower utilizes from the credit made available to him determines the Credit utilization ratio.
Take for example, your credit card allows you ₹3,00,000 and you use ₹1,50,000 worth of credit, then your credit utilization will be 50% of your available credit limit.
A higher credit utilization impacts your credit score inversely since it shows that you are living beyond your means. So, the idea is to use your credit cards at 30% or less of credit utilization and clear the payments in time to maintain a decent score.
Credit Line or Duration:
When you apply for a credit line, it appears as a new account in your reports. So, when you keep adding newer lines of credit, it indicates lack of financial planning and adds a shadow on your intent to pay back on older lines. As a result, the credit score gets negatively impacted.
If credit lines are paid back in good time and no defaults are recorded; the credit score improves.
Types of Credit:
Whether you are using a single source of credit (e.g., one credit card) or balancing it out between credit cards and loans/credit lines will factor into your credit score. It is favorable to opt for a combination of credit products i.e., credit cards, secured and unsecured loans. The right mix of credit and proper servicing of the loan is a sign of a healthy credit profile.
Other Factors:
These include your recent credit behavior, number of enquiries for new credit (each time you apply for a loan or credit card, there is an inquiry into your credit history), etc. So, getting new credit cards just for the points or offers may not be a great idea.
Thus, while applying for a personal loan your credit score is of utmost importance and lenders will largely depend on it in order to decide whether to extend you credit or not.