Understanding CIBIL score: Importance and factors affecting it!

What is Credit Score?

A Credit Score is three digit summary of your Credit behaviour/history. The score is derived from Credit Information Report, which is other words is the Credit payment history of loan availed over a period. This report does not contain the history of your fixed deposits or savings account.

How Do You Read Your Credit Report?

The report has detailed information on the credit you have availed, be it a home loan, car loan, personal loan, overdraft facility or Credit card. It is possible to download a free report with various details of the report and the credit score. 

1. The CIBIL score is calculated based on the credit behaviour that is reflected in the Account and Enquiries section. The score ranges between 300-900. A score above 700 is considered good.
2. The report also contains details like your name, gender, an identification number such as PAN, Passport details, and Voter’s number.
3. The Address and contact information is also mentioned in the report.
4. Monthly and Annual income details are reported by banks and Financial institutions to CIBIL.
5. Detailed record of credit facilities including the name of the lender, type of loan or credit, account numbers, Start date, end date, current balance and a month on month record. The details of past three years are mentioned in this record.
6. The most important detail, every time an inquiry is made for credit, it gets registered in the CIBIL report.

The importance of CIBIL Score

CIBIL scores are highly significant when availing credit, especially loans. Banks and Financial institutions Check your CIBIL Score before approving a loan. When you apply for a loan or credit, the lender will check the CIBIL score, and your loan may be rejected due to the low rating.  On the other hand, if the score is high the lender will consider the application and go on to the further formalities.  The higher your score, the better the chances of loan getting approved.

Where do your CIBIL score matter?

• For Credit Approvals: AS mentioned above CIBIL score plays a vital role when applying for a loan. Lenders consider this score as an eligibility factor to grant credit. A bad CIBIL score would lessen the chances of the loan being approved.
• For Low-Interest Rates: A good score would also help in getting the competitive interest rate on loan.
• Employment: Off late even corporates have started checking the score to ascertain how responsible employee is towards his liability. A good score is a certificate that the employee is in charge and focussed.

Factors Affecting Credit Score:

The most important factor affecting credit score is the repayment history.  Payment record forms almost 30% of the Credit scoring.  Timely payments play a substantial role in building a good credit score.

Below are few important factors affecting the CIBIL score:

1. Timely Payments: The higher the percentage of timely payment the better is your Credit Score. The payment record is the most high rated factor used in calculating the score. A consistent payment pattern denote a dependable borrower. Banks are thus reassured that there is a high probability of timely payments in future.  Even a single late payment can have adverse effect on the score, it is thus important to make timely payments.
2. Negative Marks:  Negative remarks in the report can denote one of the many things. Foreclosure: accounts in collection due to payment default.  This is a highly weighted factor and negative remarks can affect the eligibility for a loan.  Negative mark would mean you were not able to adequately manage the credit and aids as a warning to potential lenders.
3. Length of Credit History: Longer credit history gives reassurance to the bank as they have substantial data on your credit behaviour. For example, if you own a credit card for more than 8 years, lenders can see the repayment record of 8 years. On the other hand if you just got a credit card, banks do not have sufficient information. Therefore, it is not advisable to give up on your old credit cards, as they provide a good credit picture.
4. Number of Enquiries: Multiple hard enquiries can reduce your credit score to a considerable level. It is a sign to the potential lender that you are applying to several lenders to maximise the chances of securing loan.

All in all, a responsible behaviour towards your credit is all it needs to secure a good score. If there are any anomalies, it is advisable to fill the form available on CIBIL’s website with necessary documents to get it corrected.  It is also important to remember that CIBIL is only a data base that receives information from various platforms. It personally does not contribute anything to lower the score. The banks and financial institutions are the ones that provide information to CIBIL which CIBIL then consolidate and scores.