The word CIBIL stands for Credit Information Bureau (India) Limited. Since, CIBIL is one of the most trusted credit information companies in India, engaged in maintaining the records of all the credit-related activities of companies as well as individuals, including credit cards and loans, its score is referred to as your credit score.
The words ‘CIBIL score’ are often used synonymously with ‘credit score’ and refer to a three-digit score between 300 & 900, which acts as a measure of your credit worthiness.
The score is derived after taking into consideration your credit history and details found in your CIBIL report, which is maintained as a record by Transunion CIBIL. This information refers to all financial transactions where you have borrowed or repaid money. It’s an important factor that lenders look at while evaluating a loan application. Hence, it’s important to understand how the score is calculated. While there is a proprietary algorithm that determines your CIBIL score, the most important elements of the score composition are based on an individual’s loan payment behaviour.
What is Credit Score?
Credit score is important because it showcases how dependable or risky you are as a borrower. Thus, it has a direct impact on how eligible you are for a loan, what the lender will offer you as a loan amount, and the rate of interest you will be charged. Your credit score allows lenders to judge the potential risk in lending you money.
As an individual, even businesses are given credit scores. For a business, the CIBIL score impacts how creditworthy a lender will find the company. A business credit score could also impact its ability to attract investment.
Credit Score Range
NA/NH: This means it is either ‘not applicable’ or ‘no history’
350-549: A CIBIL score in this range is considered as a bad CIBIL score.
550-649: A CIBIL score in this range is considered as fair.
650-749: A CIBIL score in this range is considered that you are on a right path
750-900: This is an excellent CIBIL score
Calculation of Credit Score
Credit bureaus in the country compute credit scores after taking into consideration several factors such as your credit history, repayment behaviour, and credit type, among others. There are four credit bureaus in the country – TransUnion CIBIL, Experian, Equifax, and CRIF High Mark. They are licensed by the Reserve Bank of India (RBI). The financial institutions in the country send your credit details monthly to these bureaus. Each credit bureau has its own algorithm and method of calculating scores.
Payments History
If you are not able to pay credit card bills and EMI on time, it will have the highest impact on your score.
Credit Exposure
It is advised to avoid delayed payments as well as missed payments, as they get reported and affect your score in a negative way.
A long credit history works well for your credit score as it gives the lender an insight of your repayment patterns over time.
Total types of account
It is better to have a good balance of secured as well as unsecured loan in your credit history.
How to maintain Good CIBIL score
Your CIBIL score is based on your credit history and past payments, but it subsequently impacts your future access to credit. What you do today can help you build a stronger and healthier credit footprint.
- Pay your EMIs on time to create a proper track record
- Avoid having a credit card that you don’t use, cancel dormant credit cards
- Manage your credit cards carefully by setting payment reminders.
- Choose lengthy loan tenors with care and try to make part prepayments when you can
- Maintain healthy credit mix of secured and unsecured loans- too many unsecured loans may be viewed negatively
Monitor your co-signed, guaranteed, and joint accounts monthly. Remember that you are held equally liable for missed payments in co-signed, guaranteed or jointly held accounts, and your joint holder’s (or the guaranteed individual’s) negligence could affect your ability to access credit when you need it.
