What is CIBIL Score?

If you’ve ever applied for a loan or credit card and been rejected or worse, offered sky-high interest rates, you might have been left wondering, “What went wrong?” The answer often lies in a number you might not have paid much attention to: your CIBIL score. When applying for a loan, several factors are considered before the lender approves your application. While all of these factors are important, your CIBIL score is arguably the most influential.

So what exactly is CIBIL score? CIBIL score is a three digit number that represents your credit history. In simple words, it reflects your creditworthiness which is essentially a measure of how reliable you are in repaying debts. It is calculated by CIBIL (Credit Information Bureau India Limited), one of the major credit bureaus in India. The score typically ranges from 300 to 900, with a higher score indicating better creditworthiness.

In this article, we’ll dive into what makes up your CIBIL score, how it’s calculated and most importantly, how you can improve it for a healthier financial future.

How is CIBIL Score Calculated?

When determining a CIBIL score, a number of prerequisites must be fulfilled; fulfilling these requirements indicates a high CIBIL score. When calculating your CIBIL score, the following primary criteria are taken into account:

  • Payment History: This is among the most crucial elements that affects your CIBIL score. It keeps track of whether payments of utility bills, loan EMIs and credit card bills are made on time. A record of timely payments boosts your score, while missed or delayed payments can lower it.
  • Credit Utilization: This refers to the proportion of your credit limit that you are currently using. Your score may suffer if you use a significant amount of your credit limit because it gives lenders the impression that you may be overusing credit. 
  • Credit Mix: This factor evaluates the variety of credit types in your profile, such as credit cards, education loans, home loans and car loans etc. A mix of secured (home loan) and unsecured credit (credit cards) shows lenders you can manage different debts responsibly. Relying too much on one type of credit may indicate limited experience in handling diverse financial obligations.
  • Length of Credit History: This is how long you have been using credit. A lengthier credit history gives lenders more information to examine your repayment patterns, which may work in your favour. However, a limited credit history may make it difficult for lenders to appropriately assess your creditworthiness.
  • Recent Credit Inquiries: Every time you apply for a new credit card, loan, or other forms of credit, an inquiry is made on your credit report. If you’re frequently applying for credit, it may signal financial distress or an overextension of your financial resources, which can negatively impact your score.

What is an Ideal CIBIL score?

Let’s delve deep into the different CIBIL score ranges and what they translate to in terms of increasing or decreasing your credit worthiness. 

CIBIL Score Range Meaning
750 – 900 This range is indeed considered excellent. A score between 750 and 900 suggests a solid credit history with consistent, timely repayments.
700 – 750 Scores between 700 and 750 are considered good, meaning while you’re still viewed as a low-risk borrower, some banks may conduct a more thorough assessment depending on their internal policies.
550 – 700 This range is where things start to get tricky. This range indicates that there may have been some payment issues in the past, such as delayed payments or defaults, but not necessarily major credit problems. 
300 – 550 This range indicates a history of significant credit problems, such as late payments, defaults, loan write-offs, or excessive leverage. Lenders may view you as a high-risk borrower, making loan approval extremely challenging. 

Also Read: What is a Collateral? – Understanding its Meaning, Purpose, Types and Importance

Improving Your CIBIL Score

Your credit history and previous payments determine your CIBIL score, which in turn affects your ability to obtain credit in the future. You may create a stronger and healthier CIBIL score by the actions you take today. The following brief advice will help you raise your score:

  • Pay your bills on time: Timely payment of all your dues has the most significant impact on your CIBIL score. Payment history makes up the largest chunk of your credit score calculation. Set reminders or automate payments to avoid missing deadlines.
  • Keep credit utilization low: Your credit utilization ratio is the percentage of your credit limit that you’re currently using. Ideally, you should keep it below 30% of your total credit limit. High credit utilization suggests you’re over-relying on credit, which can negatively affect your score.
  • Clear existing debt: If you have outstanding debt or loans, try to clear them as quickly as possible. If possible, prioritize paying off high-interest debts first (like credit cards).Reducing your debt-to-income ratio will improve your creditworthiness. 
  • Avoid multiple credit applications: Too many inquiries within a short time frame can negatively affect your score. Apply for credit only when necessary and try to space out your applications.
  • Maintain a healthy credit mix: A diverse credit mix shows that you can manage different types of credit responsibly. Avoid relying too much on one type of credit. 
  • Keep old accounts open: The length of your credit history is another important factor in your score. If you have old, well-managed accounts, it’s a good idea to keep them open. 
  • Use a co-applicant or guarantor: If your credit score is low, applying for loans with a co-applicant or guarantor with a strong credit profile can help. 
  • Use credit cards responsibly: If you have a credit card, use it wisely. If you’re carrying a balance, aim to reduce it gradually. Over time, responsible use of a credit card will improve your credit score.
  • Seek credit counseling if necessary: If you’re struggling with managing debt or improving your credit score, consider seeking help from a credit counselor. They can guide you on effective debt management strategies and help you plan a way out of financial trouble.

Benefits of Good CIBIL Score

  • Lower Interest Rates: One of the main advantages of having a good CIBIL score is the opportunity to secure lower interest rates. Lenders determine interest rates based on the perceived risk. A high credit score reassures them that you’re a reliable borrower who will repay on time, allowing them to offer you loans at a lower interest rate.
  • Higher Chances of Loan Approval: A strong credit score significantly boosts your chances of getting your loan application approved. Lenders will check your credit history and if your CIBIL score is high, it indicates a history of regular and timely repayments. As a result, they’re more likely to approve your loan with confidence.
  • Higher Credit Limit: A good CIBIL score signals that you’re a responsible borrower, which can lead to a higher credit limit on your credit card or a larger loan amount. Lenders are more willing to extend you a larger line of credit because they view you as someone who can handle and repay debt responsibly.

How to Check CIBIL Score Online?

  1. Go to the official website: www.cibil.com.
  2. On the homepage, look for and click on the ‘Get Your Credit Score’ option.
  3. You’ll be offered several subscription options to access your CIBIL score and report. Select the one that best fits your needs.
  4. Provide the necessary identity verification details, including your name, date of birth, address, and PAN card number (or other details as required).
  5. After filling out the form, click on ‘Proceed to Payment’.
  6. Complete the payment using your preferred payment method, such as credit/debit card or net banking.
  7. Once the payment is processed, your CIBIL report and score will be sent to your registered email address. You can also view it directly on the website.

The Role of Your CIBIL Score in Getting an Education Loan

Banks and financial institutions do provide education loans to students from economically backward backgrounds, making education more accessible to those in need. However, a common misconception is that CIBIL score maintenance is not important when applying for an education loan. In reality, this couldn’t be further from the truth. While banks may offer education loans with certain relaxations, your CIBIL score remains a crucial factor in the approval process.Here are some key points to consider regarding CIBIL scores when applying for an education loan.

  • A minimum CIBIL score of above 700 increases the likelihood of securing an education loan for higher studies. Those with scores below 700 may encounter approval challenges.
  • The CIBIL score is crucial not only for the individual applicant but also for their co-applicants when applying for an education loan. While the immediate impact on the CIBIL scores of both parties may be minimal, it still plays a significant role in the loan approval process.
  • A parent’s credit score plays a crucial role in securing a student loan. Banks often assess the credit score of the parent(s) when evaluating education loan applications. While it’s common for students to have limited or no credit history, this is not seen as a disadvantage, especially considering their young age. The creditworthiness of the parent(s) helps offset the lack of a student credit history, improving the chances of loan approval.
  • Like other loan products, late payments or defaulting on a student loan or an education loan will lower one’s credit score.

Also Read: What is Education Loan Underwriting?

FAQS

How long does it take to improve my CIBIL score?

Improving your CIBIL score can take time, depending on your current score and the actions you take. Typically, small changes like paying bills on time can begin to show results in 3 to 6 months. However, significant improvements, especially if you're clearing past dues or reducing credit utilization, may take 6 months to a year or more.

How does frequent loan applications affect my credit or CIBIL score?

Frequent loan applications do impact your credit or CIBIL score negatively because this will make you appear “credit hungry”, generally indicating that you have been searching for multiple different applications in a short period of time. This would activate a credit check called hard inquiry, potentially lowering your credit or CIBIL score.

Can a person apply for an education loan even with no credit score?

Yes, students with no credit history can still apply for an education loan, as most lenders do not consider the student’s CIBIL score when approving the loan. However, the CIBIL score of the co-applicant, typically the parents, will be taken into account. A strong credit score from the co-applicant increases the chances of loan approval.

Does delaying repayment of a loan affect a person's credit score?

Yes, failing to repay a loan on time can significantly impact your credit score. Consistently missing payments or defaulting can hurt your creditworthiness and make it more difficult to secure future loans or credit.

Can I apply for an education loan if I have a low CIBIL score?

Yes, it is possible to apply for an education loan with a low CIBIL score, but it may pose challenges. Lenders typically consider the CIBIL score of the co-applicant (usually the parents) as well, so if they have a good credit score, it can improve your chances of approval. In cases where both the student and the co-applicant have low scores, lenders might ask for additional security, such as collateral, or offer the loan with a higher interest rate.

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