A person's creditworthiness is represented by a three-digit number called a CIBIL score. It is a summary of a person's financial behaviours and credit history and goes from 300 to 900. Numerous variables, including historical credit history, repayment patterns, credit utilisation, types of credit utilised, and length of credit history, among others, are taken into account when calculating the score. Banks and lenders use the score to determine a person's creditworthiness prior to accepting a loan or credit card. It is issued by the Credit Information Bureau (India) Limited (CIBIL).
As an illustration, suppose Mr. A wants to apply for a personal loan. In order to decide whether or not someone is creditworthy, the lender will first look at his CIBIL score.Assume Mr. A has a CIBIL score of 800, which is regarded as being a good score. Since he has a strong credit history and is likely to repay the loan on time, the lender is more likely to approve his loan application in that situation. On the other hand, if Mr. A has a low CIBIL score, say 500, the lender might turn down his loan application because it indicates that he has a spotty credit history and might default on the loan. Therefore, keeping a high CIBIL score is essential for people to be able to obtain credit facilities and financial services.
What is a Good CIBIL Score ?
A CIBIL score in the 750–900 range is considered to be good. A score of 750 or more is generally regarded as acceptable, and it raises the likelihood that a loan or credit card will be approved. Banks and lenders prefer borrowers with high credit scores since it shows they have a strong credit history and are likely to make their loan payments on time.
Why is it Important to Maintain CIBIL Score?
Being able to access credit facilities like loans and credit cards depends on having a high CIBIL score, thus maintaining one is crucial. The CIBIL score is frequently used by lenders, particularly banks and financial institutions, as a key criterion to assess a person's creditworthiness before accepting any loan arrangement.
Increased chance of being approved for credit cards and loans.
Greater likelihood of getting bank loans and credit cards with reduced interest rates from lenders.
Decreased chance of defaulting.
The availability of loans that have been pre-approved.
Discounts that might be offered on processing costs and other fees associated with credit facilities.
What Factors Affect CIBIL Score?
The four main elements that make up the CIBIL score, each of which has a different weighting, are used to indicate a person's creditworthiness. They are as follows:
History of payments (30% of the total)
For a credit score to remain high, a positive payment history is essential. It appears that the borrower is having difficulty keeping up with deadlines and managing their credit health if EMIs and credit card bill payments are late or missed. To keep your credit in excellent standing, you should always make your loan and credit card payments on schedule.
Credit Utilisation Ratio (25% of the total weight)
The proportion of the entire credit amount that the borrower has utilised is known as the credit utilisation ratio (CUR). The maximum amount that borrowers should spend from their total credit line is 30%.If a borrower exceeds this advised spending limit, it has a negative effect on their credit score and shows that they are very reliant on credit.
Type and length of credit are weighted 25% each
A person's proficiency in managing various types of accounts can be shown in the balance between secured and unsecured loans they have. In order to receive the loan amount, secured loans demand a security pledge, whereas unsecured loans do not. Additionally, one becomes qualified for more loans if they have a long credit history without any payment defaults.
Credit Inquiry (20% of the total weight)
To check someone's credit history is to do a credit inquiry.A soft inquiry is one that the user can make on their own, but a hard inquiry is one that banks or lenders make to confirm a person's credit history. The recommendation is that borrowers avoid making multiple credit queries because doing so lowers their credit score.
What are the Types of Loans Impacting CIBIL Score?
Depending on the borrower's responsibility to give the lender security, loans are split into two categories:
Secured loans demand collateral from the borrower as a deposit to guarantee the loan amount. Homes, mortgages, cars, car titles, and life insurance loans are a few examples of secured loans.
Borrowers applying for unsecured loans are approved based on their credit score and other factors; these loans are not secured by any kind of security. Consolidation loans, loans for weddings, loans for festivals, loans for home improvements, and top-up loans are a few examples of unsecured loans.
According to the borrower's payment history and other circumstances, both secured and unsecured loans might affect their credit score.A high CIBIL Score might boost your chances of getting approved for credit cards and loans by reflecting your good credit history and sound financial foundation.
How is credit card and loan eligibility impacted by CIBIL score?
ANS. When awarding loans and credit cards, banks and lenders take the CIBIL Score into account as one of the most crucial elements. outstanding credit or loan acceptance is indicated by a CIBIL score between 750 and 900, which is between good and outstanding.
What CIBIL score must you have in order to get a loan?
ANS. For loan eligibility, a minimum CIBIL score of 720–750 is required. A person's creditworthiness is highlighted when they fall within this range, which favorably affects their ability to get their loan or credit card application approved.
Does the CIBIL Score differ from the CIBIL Report?
ANS. A thorough report detailing the user's history of borrowing and repayment is known as a CIBIL report, or Credit Information Report. Thus, the complete report and other factors, along with the CIBIL score or rating, are derived.