Have you noticed emails in your inbox asking about your CIBIL score? Have you idly wondered what it is about and why you should have a CIBIL score?
Perhaps you have enough money to make purchases without needing any aid. In that case, you can go through life without having anything to do with CIBIL. But that is not true of the majority of people. Most people need to take loans to fulfil financial goals. So, knowing your CIBIL Score would be a priority for you. The CIBIL score is a vital piece of information that any lender would seek.
So, What is a CIBIL Score?
CIBIL stands for Credit Information Bureau (India) Limited. This company was set up in the year 2000. Its goal was to track and monitor the credit histories of financial consumers. Financial institutions and banks who lend money turn to this database for information. This makes it easier for them to assess the creditworthiness of a prospective borrower. In other words, they know from your credit score with CIBIL whether you are likely to repay your loan on time. Your CIBIL score tells the lender whether you are likely to stick to their payment schedule.
Say, you file a loan application with a bank or a finance company. The company then checks your credit score from CIBIL. If it is above a certain level, it means you have a good credit history. The lender will then process your loan application. Otherwise, it may reject your application. Think of the CIBIL score like the cut-off marks for gaining admission to a college or university.
Now, you may wonder how and why CIBIL knows your credit history. After all, you probably know hardly anything about the company. Well, most lenders share their data with CIBIL. Even details about your credit card usage and payment history go to CIBIL. That is because using a credit card is like taking a loan to make a purchase.
Your credit score is a three-digit number. It ranges from 300 to 900. The higher it is, the better are your chances of getting a loan. According to CIBIL, an ideal score should be above 750.
How is your CIBIL Score Calculated?
A number of factors go into building your score. Here are the four major ones:
Repayment history: Your repayment history of existing and past loans is very important. On-time payments and prepayments increase your score. Meanwhile, defaults and late payment reduce it. This is true for your credit card payments as well.
Utilisation of your credit limit: Suppose you frequently hit the limit on your credit card. This could have a negative effect on your credit score. Of course, you could repay the entire loan outstanding in one go, before the due date. This will assure your bank about your solvency. Your ability to pay off your debts on time will lead to a good score.
More unsecured loans in your portfolio: Automobile loans and housing loans are secured. In other words, they are backed by an asset, which is the car or the house. Suppose you are unable to repay the loan for some reason. You can always take back the asset and sell it. Personal loans and credit cards are unsecured loans. They do not need the backing of any assets other than your personal assurance of repayment. If you have too many unsecured loans, it could affect your score.
Too many loans in our portfolio: Having too many loans running concurrently is not a good thing. Lenders will not look upon this favourably. Having too many loans (even secured ones) means a high debt burden. Financial institutions are cautious about lending to such persons.
Why is the Credit Score so Important?
Financial institutions rely on the CIBIL score when appraising your loan application. Remember, the credit score is not the only parameter on which your loan sanction will depend. There are other factors too. These include your place of employment, your salary, and your tax and bank statements. Lenders will also consider existing loans for which you are already making repayments. But a good credit score does increase your chances of getting approval for your loan.
The score is important not just for a loan. It can also affect your chances of getting a credit card, if you do not have one already.
How do You Ensure that you have a Good Credit Score?
- Make sure to make your loan repayments on time. Do not miss due dates. Set up an auto debit system from your bank for this.
- In case of a credit card, pay off all your outstanding in one shot. If you are unable to do it, do not go beyond two instalments (unless you are on a scheme offered by the card issuer). Do not use the maximum limit on your card all the time.
- Do not apply for too many loans at the same time. For example, say you already have a housing loan. Wait for a few years and for your salary to rise before applying for a car loan. There is a rule of thumb to keep in mind. Ensure that the repayment amounts of all your loans together do not exceed 50% of your net income.
- Avoid taking unsecured loans. Do not hold too many credit cards.
- Are you a guarantor for a loan taken by a friend or family member? Then you have equal liability for repaying the loan as the borrower. Make sure the borrower is making the repayments on time.
All the points are important if you need to increase your credit score. In fact, if you follow all the rules, you do not have to worry about your score at all.
Credit scores do not remain static. They are continuously monitored and updated. It is in your interest to check your CIBIL score from time to time. Find out whether it is above a certain level or it is slipping. There is another major reason you should check your credit score periodically. This helps you to ensure that it is correct and that there are no discrepancies. It is possible that you faced repayment issues in the past. You may have resolved these but your credit rating may not reflect that. In such a case, take it up with the financial institution concerned.
You can fix any slippages in your credit rating. To repair your credit history, bring your repayments on schedule. This will improve your credit history and raise your credit score.
Tips to Improve Your Credit Score
- Clean up all your credit card outstanding. Unpaid balances keep collecting interest. These have a negative impact on your credit rating. Being prompt in paying off credit card balances raises your CIBIL score.
- Discrepancies in your credit information report (which contains the history of all the loans you took and their repayments) have to be brought to the attention of CIBIL and the concerned institution. You have to follow up with your lender to make sure that errors are rectified and the information updated. This will improve your score.
- Pay off your more expensive loans first. This means unsecured loans such as personal loans. This reduces your interest burden and improves your overall financial stability.
- Check your credit score regularly to monitor it This can help you catch errors well in advance, helping you improve your score.
- Do not overindulge on credit. This means that don’t jump at a loan for instant gratification. Every loan application means the lender will be checking your credit report with CIBIL and that can have a negative effect on your score
- Do not take the easy way out and opt for a negotiated settlement of a loan. This is bad for your credit history as it indicates an inability to repay.
Now, you might wonder where you can see your score. Click on https://www.cibil.com/creditscore/. This will lead you to a page where you can input details, make the payment, and see your score.