A recent survey stated that almost 68% of Indian borrowers are unaware of their CIBIL score, reflecting the lack of financial literacy among Indians. This three-digit number represents the overall financial health of an individual. Consequently, prospective borrowers need to know the meaning of the CIBIL score and the factors affecting this score.
What is the meaning of CIBIL?
TransUnion CIBIL generates the CIBIL score, a 3-digit numeric summary of an individual’s credit behaviour. The credit rating agency derives this score from the particulars of an individual’s CIBIL report, which includes records of credit cards and loan accounts, their payment status and outstanding debt.
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Based on the mix of borrowings and repayment history, this score represents the creditworthiness of individuals. CIBIL score ranges between 300 and 900, and the higher the score, the better the chances of loan approval. Indeed, 79% of loans are disbursed to individuals with a CIBIL score of 750 or above.
Factors affecting CIBIL score
The CIBIL score calculation includes four significant factors, with each factor contributing different weightage. Mentioned below are these factors:
- Credit utilisation ratio
A high credit utilisation ratio represents an individual as a credit-hungry one and can affect the credit score negatively. Ideally, one should spend up to 30% of their credit limit. Resultantly, individuals must monitor their credit expenses regularly and ensure maintenance of a low credit utilisation ratio.
- Payment history
Prospective borrowers must know how the CIBIL score is important for lending and maintaining an impressive payment history. To improve the credit score, one must make prompt payments for credit card bills and loan EMIs. Any delay in payments or EMI defaults can significantly bring down this score. A recent analysis by a leading credit rating agency states that 30-day delinquency in payments can hamper the credit score by 100 points.
- A mix of credit and their duration
CIBIL considers the number of years an individual holds a credit account. In addition, a healthy balance between unsecured and secured loans may significantly boost one’s score. A long credit history backed by decent repayment behaviour portrays a borrower as a responsible one.
Along with this, the duration of a credit account also has great significance. That is why financial experts suggest that one must not close their old credit cards as it leaves a gap in their credit history.
- Multiple enquiries
Another vital factor that affects the CIBIL score is making multiple credit enquiries at once. When individuals apply for a loan, a financier initiates an enquiry with credit rating agencies, regarded as hard queries. Repeated hard enquiries will result in a reduction of the CIBIL score.
Besides knowing the meaning of the CIBIL score and the factors that affect it, one should also learn how to check it for free.
How to check CIBIL score for free?
Individuals can check CIBIL scores for free once a year. It is advisable not to conduct frequent checks; however, one must ensure that there is no discrepancy in this report. Note that if your CIBIL score is below 750, you will have to improve it gradually. Although securing a loan with a low CIBIL score is possible, individuals may have to experience strict terms and high-interest rates.
Here are the steps through which one can check their CIBIL score:
Step 1: Log in to the CIBIL website and click on the “get your CIBIL score” option in the top right corner.
Step 2: Upon doing this, a new page will open with the subscription options. Select the “free” option from there.
Step 3: Create an account by entering your details as asked in their respective fields.
Step 4: Verify identity by entering the OTP sent to the entered mobile number. Hereupon, you will see a new window confirming the verification. Open the dashboard to proceed.
Step 5: Subsequently, you will be taken to a website to free CIBIL score and report.
When it comes to obtaining credit, the CIBIL score is the most crucial parameter. It builds credibility in the borrower from the viewpoint of a lender.
To get quick loan approval and a competitive interest rate on your loan, you must be well-versed with the meaning of CIBIL. Inspect the CIBIL score through the steps mentioned above and know the factors that affect credit score to take gradual steps in substantiating your creditworthiness.