Importance of CIBIL Score and How it is Calculated

Author : tanvibajpai1718
Publish Date : 2021-05-20 10:13:11
Importance of CIBIL Score and How it is Calculated

Credit Information Bureau Limited (CIBIL) score serves as an essential lending metric for financial institutions. It allows them to gauge the creditworthiness of a loan applicant and the risk of default associated with them. 

Based on one’s CIBIL score, lenders not just decide an applicant's loan eligibility but also offer suitable terms of repayment. Since a lot depends on this score, it is imperative for individuals to learn more about it and how it impacts their borrowing capacity. 

What is CIBIL Score?

CIBIL or credit score is essentially a 3-digit numeric summary of an entity's credit history. Generally, credit score ranges from 300 to 900 and is issued by four credit bureaus – Equifax, CIBIL, Experian and HighMark. Such a score is derived by weighing the information recorded in the Enquiries and Accounts sections of a CIBIL report.

This score represents the creditworthiness of an individual and provides insight into his/her track of borrowing and repayment. Most financial institutions consider a CIBIL score of over 750 as favourable and prefer applicants who possess the same over others.  

Notably, the higher the entity's credit score, the more likely they are to secure loan approval or/and better terms of repayment like a lower interest rate. 

However, individuals must make an effort to know more than the CIBIL full form. For instance, how the same is computed and the factors that influence it. Rest assured, it would help individuals to monitor their financial health effectively.

How to compute CIBIL score?

Several factors are taken into consideration to compute an entity's CIBIL score. The same are discussed below –

●      Credit mix

The credit mix of an individual makes up around 10% of the score. Generally, a well-balanced mix of secured and unsecured loan products in the credit profile influences individuals' CIBIL score positively. 

●      Payment history

Late EMI payment or defaulting on loans negatively impacts one's credit score and hampers individuals' creditworthiness. Notably, the repayment history accounts for 35% of the score. 

●      Frequency of enquiries

Every time a financial institution carries out an enquiry on an applicant, it leaves a hard pull on his/her credit report for nearly 2 years. Accordingly, multiple enquires not just hamper credit score but also paint applicants as 'credit hungry'. This also contributes at least 15% to the score. 

●      Credit utilisation ratio

A high credit utilisation ratio indicates a high debt burden. Resultantly, it hampers the CIBIL score of the entity in question. This ratio accounts for nearly 30% of the credit score. 

●      Loan tenor and repayment record

The record of repaying loans with a longer tenor is also factored in to determine the credit score. It indicates the financial discipline of the borrower and makes up at least 15% of his/her credit score. 

The process of computing CIBIL score is quite challenging. However, leading financials have simplified the entire process significantly by allowing individuals to check CIBIL score for free online. This helps ascertain one's creditworthiness and to monitor the same from time to time. Accordingly, they can take the required steps to increase the same to make the most of their loan borrowing experience. 

Tips to improve credit score

These are a few effective ways in which one can improve the existing score since an instant loan without CIBIL is not readily available –

● Pay credit card bills and loan EMIs on time.

● Avoid applying for multiple credits at once.

● Maintain a low credit utilisation ratio of around 30%.

● Consider applying for a loan with a co-applicant.

● Always maintain a well-balanced mix of secured and unsecured loans.

Besides these, individuals should also make it a point to check credit reports frequently. This will help them to identify and eliminate financial inaccuracies that hamper credit score at the earliest.

Hence, to secure lucrative terms of repayment and quick loan approval, individuals must find out more than just CIBIL full form. However, suppose individuals with a low credit score find themselves amidst a financial crisis and feel the need to avail a loan urgently. In that case, they should look for other alternatives. For instance, they should look for ways to avail themselves of an instant loan without CIBIL.

Category : business

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