When you apply for a loan, the first thing the lender will look at is your CIBIL score. Credit Information Bureau India Limited is abbreviated as CIBIL. The CIBIL score is a three-digit value that runs from 300 to 900. The closer the CIBIL score is to 900, the better. A credit score of 750 or more is considered good. A higher credit score boosts your chances of being approved for a loan. If you have a good credit score, you can even negotiate a lower interest rate on unsecured loans like personal loans.
A high number of inquiries portrays you as desperate and credit-hungry. Lenders are hesitant to approve credit applications from such applicants. As a result, it is best to make a hard inquiry only when you are certain of obtaining a loan. Regularly monitoring your cibil score, on the other hand, falls under soft inquiries and has no effect on your credit score.
Number of loans availed and applied:
The Credit bureau will keep note of how many loans you applied for in the past and how many were granted. If several loans are denied, your credit score may suffer.
To create a healthy credit history, you should have a good mix of secured and unsecured credit. However, this factor is given a modest weightage when determining your score.
Factors influencing CIBIL score calculation
A good credit score does not guarantee that your loan application will be approved. Before making the loan available to you, the lender will consider a variety of variables. Let’s have a look at some of the most essential aspects that influence CIBIL score calculation:
Utilization of Credit
The credit utilisation ratio is the amount you spend in relation to the credit limit on your credit card. It contributes 25% to the calculation of your credit score. Take the ratio of credit amount used to credit limit to calculate your credit utilisation. Credit agencies see maintaining a high credit use or repeatedly maxing out your card adversely. It demonstrates that the person’s credit burden is increasing over time and gives the credit bureau a poor view.
History of credit
Your credit score is determined by your credit history. It carries the maximum weightage of 30% in calculating your CIBIL score. Banks and financial organisations provide personal and credit-related information to credit agencies. After that, the credit bureau compiles all the information into your credit report and calculates your credit score. The credit bureau maintains a month-to-month record of your bill and EMI payments for the last three years.
The credit report will also provide the status of each account, such as whether it has been settled or written off, as well as the total amount owed. It also contains information regarding your days past due, which are the details of the payments you have paid. If you have ever defaulted or delayed paying your equated monthly instalment (EMI) on any of your loans or made late payments on your credit card, it will have a negative impact on your credit score.
Duration and credit mix
Your CIBIL score will also be affected by the composition of your loan portfolio, which includes how many secured and unsecured loans you own. It contributes 25% to your CIBIL score calculation.
Auto loans and home loans are secured loans because they contain collateral, but personal loans and credit card loans are unsecured loans because they are not backed by any security. Any loan default or late payment will have an influence on your credit score. However, a larger weight of unsecured loan indicates that your score will be worse compared to someone who has never taken out an unsecured loan, even though both of you have made timely repayments.
Other criteria, such as how many credit applications you have made recently, account for the remaining 20% of the CIBIL score calculation. It will appear in your credit report under the Enquiry section. A greater number of credit card or loan applications provides the credit bureau a poor view of the borrower because it presents the borrower as a credit hungry individual.
What should your ideal CIBIL score be?
Any CIBIL Score between 700 and 900 is considered optimal for loans or credit. A high score increases the likelihood of your loan application being granted. A credit score of 750 or more is regarded favourable for obtaining a personal loan, a home loan, or a car loan.