In the finance domain, CIBIL score is the aspect that determines the credibility of an individual to borrow funds from financial institutions. For almost two decades CIBIL score is the first and important prerequisite for any credit application.
What exactly is a CIBIL score?
CIBIL is an acronym for Credit Information Bureau of India Limited. And a three-digit number derived through an algorithm run on the individual credit history data is referred to as Score.
CIBIL has been in operations since 2001. However, RBI granted licenses to 3 more credit information companies named Highmark, Experian, and Equifax.
CIBIL has technically collaborated with two international credit controlling bodies one being TransUnion International, a Global Credit Bureau and, Dun and Bradstreet, a global provider of credit information.
The range of CIBIL score is between 300 and 900. Scores closer to 900 are considered as a high score and vice versa. Procuring a loan becomes easier with a higher credit score compared to a lower one.
No credit history (NTC – New to credit) Poor Fair Good Very Good Excellent
Calculation of CIBIL score
Your CIBIL score is mainly dependent on the number of loans you have, timely repayments, outstanding amount, and number of credit scoring inquiries. Basically, a complete credit score history.
Credit Type and Duration
This is a mandatory document at the time of loan application. This includes a complete history of credit score and relevant inputs from banks and other financial institutions to enable the loan providers to make a sound judgment.
The report comprises of the following;
Your CIBIL score
Personal and contact details
Employment information or professional details
Account status which includes the details of loans, credit cards, outstanding amount, etc.
Credit score enquiries made through loan providers, financial agents and money lenders.
How can you check your CIBIL Score?
You can check your credit score by following the steps below:
Enter your basic details and then enter the OTP received on your mobile.
A password needs to be set up before you log in
Click on Home Finance and Credit Score page will be opened.
Basic details such as name, email ID, mobile number will be prefilled. You will need to fill in details like gender, PAN, monthly salary, and date of birth. Accept the basic terms and click on “Get My Credit Score”.
Soft credit pull versus hard credit pull
When a credit report is pulled to check your credit score, an inquiry is conducted. A credit inquiry could be done in two ways:
Soft credit pull – is a credit check done by the applicant themselves. It is also known as soft Inquiry or soft credit check. These checks may not be recorded by the credit bureau, and they are not associated with a particular application for new credit. Hence, this type of check does not affect the CIBIL score. Thus, prospective homebuyers can check their CIBIL score occasionally to keep a track of their creditworthiness.
Hard Credit Pull – is a credit check carried out by a financial institution or any other authorized lender. It is done specifically along with credit applications like a home loan or credit card application. It is also known as hard inquiry or hard credit check. Hard credit pull does affect the credit score by few points. More of these hard credit checks done greater will be the fall in the credit score.
Hard inquiries do not always, impact your credit scores. One of the most common misconceptions about CIBIL inquiries is that they always have a negative effect on your credit score. Even if a hard credit inquiry negatively impacts your credit score, it is only likely to drop up to 10 points and should recover within the year.
Main factors of CIBIL score
Your CIBIL score is derived through your detailed financial behavioral analysis. Nevertheless, we will discuss the main factors that impact your CIBIL score.
Details of past payments – Timely payments with full amount gives a positive impact on CIBIL score
Credit mix – Having a credit mix of more secured loans and less unsecured can have a good impact on CIBIL score. If a person has only secured loans compared to other having only unsecured loans, then the former will have a better CIBIL score.
Credit score enquiries – Lesser credit score enquiries will keep your CIBIL at a better place.
High credit usage – With high credit usage, it will show a large amount of debt and hence maintaining a high CIBIL score will be difficult. For example, if an individual has a housing loan, car loan, business loan, personal loan and few credit cards then it will reflect a big amount of credit.
Ways to improve your CIBIL score
Below mentioned are a few activities/habits to maintain or increase your CIBIL Score.
Make timely payments of Equated Monthly Installments (EMIs)
Apply only for the required amount of credit
Paying your credit card bill within the interest free period.
Apply for loan only if it is required and keep yourself restricted to one or two loans.
Benefits of high credit score
A high credit score has several benefits. Below are the advantages of having a good credit score:
Faster loan processing – Better credit score forms a faster positive judgment thus speeding up the loan process and once other criteria are met, eventually funds disbursement happens quicker. Lower credit scores will take more time or some period has to be given so that the credit score improves.
Higher probability of pre-approved home loan – A pre-approved home loan is granted by banks to select few customers at their own discretion. Such discretion may be exercised by banks taking into consideration inter alia the credit score of a customer.
Greater limits on credit cards and loans – Financial institutions offers greater limits on loans or credit cards for high credit scoring individual since the degree of risk is lower.
Long tenure loans can be granted – Lenders are happy to extend the loan tenure for high scorers with a lesser EMI as they find it as a low risk manoeuvre.
Low Interest Rates on Loans
When you have a good credit score, you own great confidence. You can negotiate with the banks/financial institutions and grab a low-interest deal. It is always in the best interest of the bank to promote loans to an individual with a high credit score
To become a credit high scorer, it is always advisable to have a high degree of financial discipline. Apply for a loan only if it is absolutely required. And finally, keep an eye on your credit score regularly and make a conscious effort to maintain or improve it.
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