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What is a CIBIL™ score?

A CIBIL™ score is a 3 digit number between 300 and 900 that is a snapshot of your credit-worthiness. There are 3 established credit rating agencies in India that issue credit scores and credit reports - CIBIL™, Equifax and Experian. The credit scores of all three bureaus are equally valid, though the CIBIL™ score is perhaps the best-known.

How is your score calculated?

Your score is calculated based on all your credit-related activity within the financial system. Member banks and other financial institutions of the credit bureaus submit credit information on their customers on a periodic (usually monthly) basis. This includes details of all payments including any late or missed payments, loans and credit card applications approved, credit limit and credit utilisation, and status of credit accounts (including Settled or Written Off accounts) among other information. All this data is then subject to complex statistical analysis and your 3 digit credit score is calculated on the basis of your credit records.

Each credit bureau uses its own mathematical formulae with different weightages given to the various component factors. In general however, about one third of your credit score is made up of your repayment history. Your track record on repaying your loan obligations is the most important factor in your credit score.

Other factors that play a role in your credit score include your credit utilisation ratio (how much you spend on a monthly basis as a proportion to your total credit limit), the age and type of your credit accounts (the older the account, the better for your score as lenders have a longer period from which to judge your repayment behaviour), and number of enquiries from lenders (which reflects the applications you have made for loans and credit cards). There are a variety of factors that go into calculating your credit score and it is important to focus on these areas when trying to improve your score.

Importance of your credit score in the loan-approval process

A credit score of 750 and above is a good score to have as it indicates that you have a good track record of fulfilling your loan obligations. A low credit score signifies that you do not have a good history of making repayments and have a higher probability of default.

Potential lenders first look at a customer’s credit score to evaluate whether to process the application further. Data shows that an overwhelming majority of all loans that are sanctioned are made to customers with a credit score of 750 or above. Other advantages of a high credit score include:

  • Lower interest rate
  • Bigger loan amount
  • Longer tenure
  • Quicker approval process/simpler documentation
  • Higher card limit
  • It is good to learn the factors used to calculate a credit score so you can improve it, if required, and avail the best loan offers on the market.
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