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CIBIL score is a three-digit number ranging from 300-900 that defines the reliability of the borrower. High CIBIL score implies your good credit history and responsible timely repayment behaviour. If your CIBIL Score is closer to 900, there is a higher chance of approval of your loan application.
On the other hand, low CIBIL score implies a poor credit history. If your CIBIL Score is closer to 300, then there is a higher chance of rejection of loan application.
- How CIBIL Score is Calculated?
- Why CIBIL Score or Credit Score is Important?
- What is the Benefit of Good CIBIL Score?
- What are the factors that affect Your CIBIL Score?
- How to improve my CIBIL Score?
- Frequently Asked Questions
How CIBIL Score is Calculated?
The calculation CIBIL score is based on the following factors:
Your Repayment History
Timely repayment of your loan improves your CIBIL Score. So, if you have made timely repayment of your loan, your CIBIL Score will be higher. But if you have defaulted or made a delayed payment, then your CIBIL Score will be lower.
Default in timely repayment of loan results in a negative impact on your CIBIL Score. So, you have to make sure that you should make a timely repayment of your loan to have a higher CIBIL Score.
Too much of Loan Applications
Too much of loan applications to various banks or financial institutions negatively impact your CIBIL Score. Banks and financial institutions make enquiries of your credit score when you apply for a loan.
These enquiries made by banks and financial institutions to know your CIBIL Score is known as a hard enquiry. And hard enquiry negatively impacts your CIBIL Score.
An ideal mix of secured and unsecured loan result in higher CIBIL Score. Too much of unsecured loan negatively impact your CIBIL Score.
Why CIBIL Score or Credit Score is Important?
Credit Score is the important criteria to determine credit worthiness of a borrower. A higher credit score implies timely repayment of instalments. Your Credit Score is the important criteria to determine whether you are eligible for loan and credit cards. Every lender checks your credit score before granting any loan. A good credit score is not only important to get a personal loan or credit cards. But it is also required for a home loan, car loan etc.
What is the Benefit of Good CIBIL Score?
There are many benefits of good CIBIL Score
Higher Chance for Credit Card and Loan Approval
Banks and Financial Institutions reject the loan or credit card application of a person having poor credit score. Having a good credit score is not the guarantee of approval of loan application. Lenders also consider other factors. However, having a good credit score increase the chance of approval of your loan application.
Having a good credit score gives you negotiation power. You can get a personal loan, housing loan, car loan etc. at a low-interest rate. If you have high Credit Score, you can bargain with lenders for lower interest rate.
On the other hand, if your credit score is low, you can’t negotiate with lenders. You have to pay high-interest rate on your loan.
Approval for Higher Limit
A borrowing capacity of a person depends upon the person’s income and credit score. A person with a high income and good credit score is eligible for a higher credit limit. If your credit score is high, then banks are willing to grant you more loan because of your repayment discipline.
On the other hand, if your credit score is low, then banks will never grant you a higher amount. Lenders may approve your loan application with poor credit score but the amount granted by them will be lower. Further, they will charge a higher interest rate on the loan amount.
What are the factors that affect Your CIBIL Score?
Payment history of a borrower is one of the most important factors that affect the credit score. If you take any loan, ensure to repay it on time. Any delay in payment of your loan is bad for your credit score.
However, if you have a history of timely repayment of the loan, then it is best for your credit score.
The ways you utilize your credit money also affect your credit score. If you utilise the maximum amount of your credit limit or credit card limit, then your credit utilization will be higher, which is bad for your credit score.
Credit utilization refers to the percentage of your credit amount or borrowed amount utilised from your borrowed amount. There is no problem in taking multiple credit cards but make it sure that you utilise it carefully.
Excessive use of credit card ensures that you are unable to manage your finance prudently. On the other hand, if you repay your debt timely and your loan amount is decreasing, then it reduces your credit utilization rate, which is positive for your credit score.
Duration of Credit History and Credit Mix
If you have a long credit history with timely repayment behaviour, it improves your credit score.
Apart from that, a good credit mix of secured loan and unsecured loan also improves your credit score. A higher proportion of unsecured loan such as personal loan negatively impact your Credit score.
Multiple loan application
When you apply for any new loan, credit card etc. the banks or the lending institutions make enquire of your credit score. Multiple loan applications to various banks or lending institutions indicate that you are credit hungry person. In future, your loan burden is going to increase and it may be difficult for you to repay your loan.
Hence, multiple loan applications to various banks or lending institutions negatively impact your credit score.
How to improve my CIBIL Score?
Poor CIBIL Score is a nightmare for a person who wants a credit card, personal loan, education loan, car loan etc. But this score can be improved. You need to focus on below-mentioned factors to improve your CIBIL Score.
Make Payment on time
Timely repayment of debt is an important factor to determine a high credit score. You need to be punctual in repaying all your instalments. Missing out any single instalments will not only result in penalty, interest but it also negatively impact your credit score.
Don’t apply instantly for loan or credit card if your application is recently rejected.
There may be chances that your loan or credit card application got rejected by banks. In this case, instead of applying to another bank, you should wait for some time to improve your credit score. If you apply in another bank immediately after your application is rejected by one bank, there is a higher chance that your application get reject again.
In addition to that, a frequent loan application considers that the borrower is credit hungry person, which negatively impact your credit score.
Enhanced credit limit
Many times when a borrower has a high credit score, his bank offer him to enhance his credit limit. Enhancing your credit limit doesn’t mean that you have to take more loan. If a bank offers you to enhance your credit limit, it shows their trust on you.
Enhancing your credit limit will result in reducing your credit utilization rate. As a result, it will result in a higher credit score.
Check your credit report regularly
Regular checking your credit report helps you to improve your credit score. By regular checking, you may find some administrative errors on your report which results in low credit score. In this situation, you can report to your bank and rectify all these errors.
In addition to that, you can also find your mistake which results in low credit score like delay payment of your instalment, high credit utilization rate etc. After finding your mistakes, you can rectify it in future and it will improve your credit score.
Frequently Asked Questions
There are two types of enquiries, Soft enquiry and hard enquiry. Enquiring by a person to know his CIBIL Score is a soft enquiry and it doesn’t impact his CIBIL Score.
However, if a person applies for a loan from a bank or any financial institution, then they make a hard enquiry to know your CIBIL Score. Hard enquiries made by banks and financial institutions result in a negative impact on your Credit Score.
A high credit score implies the creditworthiness of the borrower. If a borrower has a high credit score, then the chance of approval of loans from banks and financial institutions is high. High credit score gives the bargaining advantage to the borrower.
On the other hand, low credit score is a nightmare for the person who want loan from banks or financial institutions. There is a higher chance of getting your loan application rejected by banks and lending institutions.
CIBIL score is a three-digit number ranging from 300-900 that defines the reliability of the borrower. A CIBIL Score above 700 is considered a good CIBIL Score. And a CIBIL Score above 750 is considered as Excellent.
Credit Score is not the only single deciding factor in a loan. There are other factors too, but the CIBIL Score or Credit Score is the most critical factor. Your Credit Score shows your creditworthiness. That is why; banks and financial institutions reject loan application of the borrower having low Credit Score.
No, if you have not taken any loan or credit card from any bank or financial institution then you have no credit history. If you have no credit history, then your CIBIL Score will be NA.
Low Credit Score doesn’t always mean that your loan application gets rejected by every bank and financial institutions. Every banks and financial institutions have different Credit Score cut-offs. Many lenders are willing to offer you a loan even your Credit Score is low. But they will charge a high-interest rate. Your goal should be to improve your Credit Score so that you can get a loan at a cheaper rate.