What is a Credit Score?
A credit score is a 3-digit number that represents the creditworthiness of an individual. In India, there are 4 credit bureaus licensed by the Reserve Bank of India to provide credit scores. All four credit information companies have the database to provide their individual credit score, while the most popular is CIBIL Score.
What is the difference between CIBIL Score and CIBIL Report?
Although both the CIBIL Score and CIBIL Report play a significant role in the approval of your loan application, they have a few differences.
CIBIL Score
CIBIL Score is a 3-digit numeric summary of your CIBIL Report that reflects your creditworthiness based on your credit history and payment behaviour.
CIBIL Score is based on the last 24 months of your credit behaviour.
CIBIL Report
CIBIL Report is a comprehensive document detailing your credit history that includes your contact details, personal information, loan account and credit card information, employment information, and enquiry information.
CIBIL Report includes the last 36 months of your credit history.
How is CIBIL Score calculated?
CIBIL Score is calculated by using an algorithm that revolves around loan and credit card repayment behaviour of an individual. The following 6 key factors are taken into consideration while calculating your CIBIL score:
Credit Mix
Keep a balanced mix of secured (home loans, auto loans) and unsecured credit (personal loans, line of credit). It can have a positive effect on your CIBIL score.
Debt to Income Ratio
Keep your debts such as credit card bills and mortgages lower than 50% of your income to improve your credit score. A higher ratio pulls down your credit score.
Payment History
Do not default on your EMIs. Making late payments and defaulting can negatively affect your CIBIL score.
High Credit Utilization
If your outstanding balance on your credit cards is high, it indicates an increased repayment burden, which can negatively affect your CIBIL Score.
Multiple Enquiries
If you have recently applied or have been approved for multiple loans and credit cards, the lenders may view your credit profile with caution as multiple credit applications reflect your debt burden.
Negative Status
Incidences like a written-off loan, foreclosure, filing for bankruptcy, account in the collection due to default in payments adversely affect your CIBIL score immediately. This warns your potential lender that you are unable to handle your finances for which they might face difficulty in recovering their money.
What is a Good CIBIL Score?
Any score higher than 700 is a good CIBIL score. In other words, a score between 700 and 900 is what you should aim for. It indicates that you have been regular with your payments, and banks and financial institutions find you creditworthy. Some of the benefits of having a good credit score are:
A good credit score will fetch you better credit cards with higher limits and better deals.
Higher chances of getting a home loan, car loan, or personal loan. Since banks are assured of your financial behaviour and creditworthiness, they won’t reject your loan on this account, at least.
A good CIBIL score can help you negotiate or get a lower rate of interest on your loans.
You can bargain better and do away with extra expenses like processing fees, etc. on your loan application if your credit or CIBIL score is good.
What is a Bad CIBIL Score?
A score between 300 - 500 is considered to be a bad CIBIL score. A low, poor, or bad credit score is often a reflection of bad credit history. Hence, a bad credit score decreases your chances of getting a loan because your credit profile appears risky to the lender. Even if you are approved for a loan with a low CIBIL Score, it will be with a very high-interest rate. If your credit score falls in this range, it’s a red flag. Take serious measures to improve it.
Importance of CIBIL score for Personal Loan & Credit Card Approval
CIBIL scores play a crucial role when it comes to taking loans. When you apply for any kind of a loan, the first thing the lender does is download your credit report to access your creditworthiness.
If your CIBIL score is high, the odds of you getting a loan are high. You can also negotiate better loan terms and bargain on some fees and charges.
But if your CIBIL score is low, your chances of getting a loan approved are likely to be low. However, if you meet other loan eligibility norms, the lender may grant you the amount you need.
How to Maintain & Improve CIBIL Score?
If you happen to have a low CIBIL score or bad payment history, all is not lost. The good news is that this record doesn’t stay on your credit profiles forever. You can still repair your credit history and improve your credit score. Also, if you happen to have a good CIBIL score, you need to maintain it. Just follow the following tips to get on the path to better credit health:
Make your payments on time.
Limit your credit utilization ratio.
Avoid multiple loans or credit card applications.
Try not to exceed 30% of your available credit.
Clear or consolidate your debt.
Limit your number of credit cards.
Diversify your credit portfolio.
Check your credit report for errors.
For detailed information on how to read a CIBIL Report, click here.
Difference between Credit Score, Credit Report and Credit Rating?
These terms are very closely related, and it is easy to get confused. The following points should help you differentiate between them. Besides these, there is another related term called vantage score, which is a credit scoring method.
Credit Score
Credit Rating
Credit Report
This is a 3-digit number indicative of an individual’s credit health.
These are the credit scores assigned to a company or business.
This is documentation of your financial behaviour with regards to past and present loans and credit.
This can change over time.
This can change over time.
The information in your credit reports stays for 7 years. It is then replaced by new information.
This varies between 300-900.
These are denoted by grades like AAA, AA, B+, A+ etc.
This is a compilation of information.
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