CIBIL Score – How it is calculated and why is it important?

It is always prudent to make timely payments to maintain a positive credit report. This helps in reflecting a healthy CIBIL score that enhances your future credit access in the long run.

Avoiding credit altogether also is not a good strategy to improve your credit score.

Having a good credit score goes a long way. According to experts, almost 6 out of 10 millennials are rejected due to low credit score when applying for credit cards, mortgages, car loans, and other financial products.

A credit score is a numerical expression deduced on a balanced assessment of an individual’s credit details to signify his or her creditworthiness. It is mainly established through a credit report consisting of information sourced from credit bureaus.

How is the CIBIL score assessed?

In India, the Credit Information Bureau (India) Limited (CIBIL) is one of the three authorized credit information companies in the country that maintains the records of all the activities that are related to the credit of companies and individuals including loans and credit cards.

Rohit Garg, Co-founder and CEO, SmartCoin says, “By utilizing an advanced algorithm, the pertinent characters of a person’s loan payment behaviour are ascertained, which helps in gauging the prospective risks that a company bears while sanctioning debts to people and neutralize bad debt losses. It is a 3-digit numeric summary of an individual’s credit history that is calculated by using data from the accounts and enquiries section of their CIBIL report.”

The report reflects an individual’s financial status and current standing. The loan history, including credit cards and their payment status, is essential to the CIBIL score. For instance, experts say to improve your creditworthiness, repaying loans on time is a great way to start. The lenders then use this score to evaluate the borrower’s repaying ability, depending on which the borrower’s loan application is approved.

Keep in mind the closer a borrower’s credit score is to 900, the higher are the chances for them to get their loan application approved. With a credit score of 750 and above, the chances of getting a loan or credit card increases, and borrowers also get attractive interest rates.

Four key indicators are analyzed to determine the credit score;

• Payment history: Delaying payments or defaulting on your payments that can be negative for the credit score.
• Credit mix: A balanced credit that includes both unsecured and secured loans is likely to influence the credit score in a positive way since it indicates that an individual is careful about their finances.
• Multiple enquiries: Inquiries about past loans can also have a detrimental effect on the score since it signifies that past loans might add up.
• Credit use: A person’s use of credit also sheds light on their spending habits. A high credit usage indicates an increasing debt, which can significantly affect the CIBIL score.

Garg says, “It is always prudent to make timely payments to maintain a positive credit report. This helps in reflecting a healthy CIBIL score that enhances your future credit access in the long run.”

Having said that, avoiding credit altogether also is not a good strategy to improve your credit score. Experts say, those with poor scores, can look at credit companies offering options that include alternative data, which can help demonstrate their financial health.