Your CIBIL score is crucial for lenders evaluating a Loan application. Hence, you need to understand how the score is calculated. While there is a proprietary algorithm that determines your CIBIL score, the most essential elements depend on an individual’s Loan payment behaviour. Let us learn what it is, how it is calculated, and how lenders use it to decide the Loan amount.
The CIBIL score’s meaning is a 3-digit number that appears on your credit report. The usual range is between 300 and 900, with 300 being the lowest and 900 being the highest. Generally, a score between 700 and 749 is good. Anything over 750 is considered excellent and increases your chances of getting your Loan approved. The score itself is dynamic in nature and keeps changing depending on your financial activity.
The CIBIL score is not limited to banks alone for understanding you as a creditworthy applicant. Credit Card companies, mortgage lenders, and auto lenders, among others, also use it as a snapshot of your creditworthiness before approving any credit request.
What is the full form of CIBIL?
The CIBIL full form can be expanded to Credit Information Bureau India Limited, which is the authorised credit agency by the Reserve Bank of India that calculates an individual’s credit score. The CIBIL score is a measurement of your creditworthiness, assigning you a numeric summary that financial institutions use for Loan, advance, or Credit Card applications.
What is a CIBIL report?
For any lender, the CIBIL report is a crucial document to review before approving a Loan application. It includes the borrower’s CIBIL score, credit history, repayment history, personal information, employment details, Bank Account details, contact information, and hard inquiry information. By analysing the CIBIL report, a lender determines whether the borrower is creditworthy or not and formulates the terms and conditions of the Loan.
A CIBIL report is generated by the company TransUnion CIBIL, a credit bureau, based on the information provided by various lending institutions from where you have taken a Loan, including Credit Card transactions. Lending institutions provide data to TransUnion CIBIL regularly, typically every 30 to 45 days.
CIBIL score calculation
After understanding the meaning of the CIBIL score, you must also know how it is calculated. The key parameters in your credit report include:
Credit history
Your history of repayments, late payments and defaults on Loans and Credit Cards is given the highest priority in your CIBIL score calculation. CIBIL collects and collates all financial information, including bill payments, EMI compliance, and other credit-related details, every month, which is then shared with relevant financial institutions.
Credit utilisation
Your current credit utilisation ratio refers to the credit amount that has been used against your total credit limit. Restricting your credit utilisation to approximately 30% of your limit, combined with the downward trend in your credit utilisation, helps boost your CIBIL score.
Credit mix and duration
Whilst calculating your CIBIL score, the bureau also runs a check on the type of credit that you have depended on the most. If your debt is of an unsecured nature, such as Credit Cards and Personal Loans, your CIBIL score will indicate that you are a risky borrower. On the other hand, Home and Car Loans, which are popular forms of Secured Loans, help boost your CIBIL score, especially if you have made timely payments during the repayment tenure.
Other factors
Besides this, some other factors that play a role in calculating the borrower’s CIBIL score include:
- The number of hard enquiries that you have made towards acquiring more credit recently
- The age of your credit
- The types of Loans you have taken
Conclusion
Monitoring and maintaining a healthy CIBIL score require responsible financial habits. A decent credit score not only makes credit more accessible, but it also opens the door to better economic opportunities and lower borrowing costs.
