A CIBIL score is a three-digit numeric sum of an individual's creditworthiness, ranging from 300 to 900. The full form of CIBIL is Credit Information Bureau (India) Limited, which generates and maintains a credit score of everyone who takes on formal credit in the market.
This score (or even an Experian Score) is a report card of an individual’s borrowing and repayment history. It is used by financial institutions to determine whether a loan or credit card applicant is eligible and how reliable they are.
Having a good CIBIL score ensures you get better loan options, are offered better interest rates, and get quick (or even instant) approvals, while a subpar score can limit opportunities or even result in rejection on the same. Let’s get into what a CIBIL Score really means, and why it matters.
Understanding CIBIL scores
If you haven’t taken a loan, paid off an EMI, or used a credit card: you’re likely to not be listed with CIBIL. In case you have, CIBIL will give you a three-digit score based on your credit history, it is calculated using information from the 'Accounts' and 'Enquiries' sections of your CIBIL report, which includes (but is not limited to) your loan accounts or credit cards, their payment status, and outstanding amounts' days past due.
The score shows your “creditworthiness” based on your borrowing and payback history, as reported by lenders. A CIBIL score goes from 300 to 900, and the higher your score, the greater your chances of receiving a loan approval. Most stats point to the fact that close to 80 percent of loan applications are approved for those who have scores of 750 and above.
Why CIBIL scores matter
A CIBIL score is essential as it assists in the following ways for both the lender and the borrower:
- A CIBIL score enables the borrower to understand their credit status. A person who handles their funds well will always have a higher CIBIL score. A lower CIBIL Score indicates that the applicant isn’t reliable, and financial institutions usually steer clear of them.
- While other elements do go into determining whether to approve an applicant's loan application, CIBIL scores also influence the interest rates offered to an applicant. A higher score may result in a loan at a lower interest rate, while a lower one may well mean a loan at a higher rate.
- If an individual has a good CIBIL score, they might not be required to submit too many documents for applying. less documentation.
- Applicants with low CIBIL scores might even need to put up assets to get a loan approved. This adds a whole new dimension of risk to taking a loan.
- A good CIBIL score usually means higher loan amounts offered while a lower one means the opposite.
- Applications with good scores are invariably approved sooner as well.
However, a CIBIL score is not the only factor used to determine whether a bank would offer a loan to an applicant. Income, job history, existing liabilities, and a few others also come into play.
Factors affecting CIBIL scores
Your CIBIL score is affected by many factors, including:
- Payment history: How consistently you pay your debts.
- Credit utilisation ratio: The amount of credit you use compared to your total credit limit.
- Length of credit history: How long you've been using credit.
- New credit: How much credit you've recently taken on.
- Credit mix: The types of credit you have, such as secured or unsecured loans.
- Credit age: The duration of your loans and credit cards.
Other factors include debt-to-income ratio, outstanding debt, and errors in your CIBIL report.
To improve your CIBIL score, you can: Pay your bills on time, reduce your credit card balance, limit new credit applications, monitor your credit report, and be responsible with your credit.
How to check your CIBIL score
After understanding the CIBIL score meaning, the next step is to determine your credit score. You can check your CIBIL score online in the following ways:
- Visit the official website of CIBIL.
- Fill out the required personal and financial information like PAN card details.
- Click on submit and verify the details.
- Upon verification, you will be able to check your CIBIL score and get a free credit report online via email.
Tip: You must regularly check the CIBIL report to stay updated on your transactions, and if your credit score is low, you may take appropriate measures to maintain or improve it. However, CIBIL only gives you one free CIBIL report per year.
Tips to improve your CIBIL score
If you want to improve your CIBIL score for a personal loan, credit card, or even for getting a place on rent (yes, this also happens) these tips might benefit you in getting the loan and boost your financial journey.
Pay bills on time
Payment history is the single most important component in your credit score. It accounts for 35% of your score, so paying payments on time has a significant influence. A missed payment can leave a bad note on your credit for up to seven years. To avoid missing a payment, set up automated payments for the minimum amount on all your bills.
Reduce credit applications
When you seek credit, your score may decrease by three to five points. While this effect is temporary, it might be the difference between acceptance and rejection. Hard credit inquiries can linger on your credit record for up to two years. However, they have just a 12-month effect on your score.
Increase your credit limit
If you've been using credit responsibly, your card provider may authorise an increase in your credit limit. An increase in your existing credit limit also lowers your utilisation rate. You may need a good reason to compel the banks to increase your credit limit. However, it is worth a try, and the change can be temporary or permanent.
Become an authorised user
If a family or acquaintance has a credit card with a high credit limit and a proven track record of timely payments, they can request their provider to register another authorised user. The primary card holder does not need to allow you to use the card or even give you the account number.
Good scores with CIBIL
A credit score is arguably the single most important factor in accessing credit, and it’s imperative for borrowers to maintain good CIBIL score ratings. As previously stated, CIBIL is India's most popular credit rating bureau, and most banks use its services. However, there are products in the market that do not require any CIBIL Score for approval.
Apply for a Lifetime Free Credit Card—All you need to do is open a Fixed Deposit with Kotak811 and 90% of the deposited amount becomes the monthly credit limit. As you use the card responsibly, you keep earning interest on the FD and enjoying some fantastic benefits: your CIBIL Score will be generated or improved over time. You can build a solid profile and become eligible for better credit opportunities in the future.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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