Taking out a loan can feel like a big decision and it is! Often, an offer comes in the mail for...
Financial terminology can often be somewhat scary, with lots of abbreviations, specialized terms, and quirky numbers. In reality, however, there is nothing to be put off by – finance can be very straight-forward if explained properly. And it’s extremely important that you truly understand your personal finance. After all, it’s your money that we are talking about! In this article, we will give you a thorough explanation of the CIBIL Score, what it is, why it is important and what affects it.
One way to think of a CIBIL Score is to imagine it as a credit report card. It measures how you have been using your credit. Based on your usage, payments, and other behaviors, the credit bureau gives you a grade point average between 300 and 900 points. The higher you score, the better you are at managing your credit. While a lower score means that you are probably not doing so great on this matter.
Every loan or credit that you take out through the bank or other financial institutions is reported to TransUnion CIBIL – India’s credit information company. The way you use this credit is also informed, such as the percentage of the credit you use, payments towards your loans and credits, any new requests for loans, etc. Based on this information, TransUnion creates a Credit Information Report (CIR). The report includes all of these transactions and using a special formula, it then calculates a weighted average, which is the CIBIL Score.
The factors that specifically impact the score include your credit history, your credit mix and duration, credit exposure, recent credit behavior, and credit use. The most important part of the evaluation is your overall credit history, meaning what you have borrowed over your lifetime and how you have managed these loans. About 50% of the score is decided between credit mix and duration, and credit exposure. The former evaluates whether your loans are secured or not, while the latter takes into consideration your outstanding credit. The remaining 20% of the score comes from the way you use your credit now – your behavior patterns, whether you’ve paid your loans and credit cards on time recently, how much credit have you used over the past 2 years, etc.
There are factors that affect your credit score positively and others that impact it in a negative manner. To maintain a higher credit score, you need to make sure that make regular payments on your current loans and credits. This is one of the most important scoring criteria. It is also preferred to have more secured loans in your credit portfolio, rather than unsecured. This basically means loans for specific purchases that have a guarantee – such as a home loan or a car loan. Another factor is how much of the credit that you have, you actually use. It’s best to keep at the low usage end, as your score will go down if you max out your credit. Last but not least, CIBIL Score takes into consideration the number of applications you make for credit and loans – fewer is better.
A high credit score signals to banks and other lenders that you are credit-worthy. Think of it as a character test. If you have a friend who is always late, never shows up when they promise and borrows books without returning them – you probably won’t rely on him or her for an important event in your life. But you are aware of this because you’ve gotten to know the person over time. Lenders are not your friends, so they must rely on behavioral information to see if you will pay them back after they have given you a loan. They may also be willing to give you more money and a lower interest rate if you rank highly since they are more assured that you will be responsible with your credit.
It’s important to note that a high credit score does not guarantee that you will receive the loan that you are applying for. On the other hand, a lower credit score does not entirely preclude you from obtaining credit either. The lender will still evaluate the rest of your application before making a decision on whether they want to lend you money or not.
Typically, if you are on the market for an important loan, for example, to buy a house, it’s important to know your CIBIL score first. This will help you to evaluate whether banks will look favorably on your application. It can also aid you in identifying steps to up your credit score before you apply. Getting the information is pretty simple. All you need to do is request your credit score from TransUnion. For a fee of about 550 Rs. You will receive both your credit score and your detailed CIR report. Keep in mind that if you have not taken out loans or credits before, you won’t have a rating. Instead, your report will just say NA or NH.
For those who are just starting to manage their finances, it is very important to realize that your credit score is a continuous evaluation. So before you take on loan burden, make sure that you are able to maintain a steady pace with paying it off and being responsible with its use. Otherwise, you may run into trouble in the future, even if have gotten to a place of loan responsibility. On the other hand, if you already have some experience in taking out credit, it’s important to know where your stand with CIBIL scores, to ensure that you are managing your debt in a correct manner.