What is a Cibil Score?
A CIBIL score is a three digit number that shows how much credit you can get. CIBIL scores by Credit Information Bureau India Limited range from 300 to 900. It is based on your credit history, which includes information about how many accounts do you have, how much total debt do you have, and whether you have been making timely payments, among other things.
Lenders use credit ratings as a tool to evaluate your credit worthiness, or your likelihood of repaying loans on time. The higher your score, the more likely you are to get approved for better rates and loans.
What’s the difference between CIBIL score and Credit score?
CIBIL, or Credit Information Bureau (India) Limited is one among the prominent credit information companies in India. It calculates someone’s credit score based on factors like their credit history, payment history, amounts owed to lenders or other people, how long such debts have existed and new checks made on them. But scores are a much broader term that comprise scores from multiple bureaus and agencies. The CIBIL score is a kind of credit score with different scoring models and algorithms used by different Credit Bureaus for their calculation.
Comparable to the CIBIL score, other bureaus also come up with credit scores based on such aspects like length of loan have existed, whether payments were ever late, overall borrowing limit but remain unfixed or not yet paid back as well as current ones made in relation to them. However both serve the need to determine someone’s ability to repay loans.
Good Credit Score:
Generally speaking, a cibil score of at least 750 and above is regarded as desirable for a home loan. This makes you more eligible for house loans and enhances the likelihood that the majority of reputable banks and financial organisations will approve your application.
Key Takeaways:
- For conventional types of loans the least possible credit score should be 620 while that for alternative mortgages can be anything between 500 and 700.
- Higher credit scores create lower interest rates.
- Paying bills on time may result to an increase in your credit score, as well as, decreasing the number of credit cards you owe and opening yourself to another person’s account.
- Credit score is one of the primary factors when you apply for a loan. Here’s everything you need to know about how to improve your credit score to buy a house.
How is the CIBIL score calculated?
There are four key factors that impact your CIBIL score:
- Payment history: Making late payments or defaulting on your EMIs has a negative impact on your score.
- Credit mix: Having a balanced mix between secured loans and unsecured loans is likely to have a positive impact.
- Multiple enquiries: Too many loan enquiries may have a negative impact on your score as it indicates that your loan burden may go up in the future.
- High credit utilisation: This may negatively affect your credit score as it depicts an increase in debt over time.
A CIBIL Score is a numeric summary of credit history that is calculated based on the following factors:
1) Track Record of Past Payments:
- Record of all past repayments
- Consistently making payments on time leads to a higher score
- Delayed payments lead to a lower score
- Recent delayed payments make a more negative impact
2) Previous Settlements, Defaults, Write-offs:
- Recent write-offs impact more negatively than older ones
- Multiple write-offs lead to lower score
- Write offs documented by lenders on previous debts lower score
- Delays or defaults on secured loan repayments impact more negatively than unsecured loans
3) Loans as Proportion of Income
- Low loan balance indicative of healthy credit usage and thus higher score
- High loan balance reduces score
4) Secured Loans vs. Unsecured Loans and credit cards
- High credit card balances lower score
- Reliance on unsecured loans (credit cards) over secured loans viewed negatively
- Lesser number of such accounts coupled with frequent payment history pushes up score
5) Loan Equities:
- Many loan enquiries to avail loans indicative of “credit hungry” behaviour, negatively impacts score.
What elements go into calculating your CIBIL score?
Your current credit score is based on multiple categories from your credit history. Your score is impacted by some factors more than others.
- Payment History – 30%
- Credit Exposure – 25%
- Credit Type and Duration – 25%
- Other Factors – 20%
1) Payment History
In order to maintain a high score, you need to be prompt with your monthly credit card bill payments as well as loan EMIs. If you are delaying your payments or are defaulting on EMIs, it will hamper your score. Irregular payment behaviour also suggests that you are struggling to manage your credit health. A recent CIBIL analysis (reported by the Financial Express) revealed that 30-day delinquency can reduce your score by 100 points.
2) Credit Utilisation Ratio:
Having a loan or multiple credit cards does not negatively impact your CIBIL score. However, if your credit utilisation ratio is high, it will bring your score down. Ideally, you should only spend up to 30% of your credit limit. A higher credit utilisation ratio suggests you have been increasing your debt and are likely to turn into a defaulter. Therefore, it is advised to keep a tab on your credit expenses and make sure you are not maxing out your limit.
3) Type of Credit and Duration:
The age of your credit history is the number of years that have passed since you opened your first credit account. CIBIL considers the average number of years for which you have been holding a credit account. Having a good balance of secured (car or home) loans as well as unsecured (credit card) loans helps to boost your score. When you have a healthy credit mix, it suggests that you have good experience in handling different types of accounts. A long credit history with good repayment behaviour makes you a low-risk borrower. It is better to start building your credit history at an early stage as it will be helpful later at the time when you’re planning to buy a house or a car.
4) Other Factors:
A credit inquiry is another factor that is considered while calculating your score. Every time you apply for a loan or a credit card, the lender will check your credit report. This is called a hard inquiry. If you make multiple credit requests within a short period, it will bring your score down. Therefore, it is advised to spread your credit applications throughout the year instead of making them all at once.
Ways to raise your cibil score prior to applying for a mortgage:
Building a CIBIL score is a slow process. You need to show consistent repayment behaviour and handle the available credit in a responsible manner to maintain a good score.
- Examine your credit ratings and reports.
- Make timely payments on all of your invoices.
- Pay off the sums on your credit cards.
- Refrain from creating new accounts.
- Consult a responsible credit user for assistance.
1) Examine your credit ratings and reports:
Regularly checking one’s score is crucial to identifying inaccuracies, fraud monitoring and overall financial health. Among the best options for checking one’s credit scores are the following licensed Credit Bureaus; TransUnion CIBIL, Equifax, Experian or CRIF High Mark respectively. It is important to remember that every individual is allowed to request a single totally free copy of a report from each Bureau once in a year.
2) Pay every invoice on schedule:
Maintaining the integrity of all of your accounts will help you raise your credit score for a mortgage. Your credit score can be negatively impacted by missing payments, and late payments can remain on your record for up to seven years. Contact your creditor promptly to explore if things can be settled out and the late payment fee can be removed if you are behind on a payment but still within the grace time. In future, try paying punctually even if you have a record of late payments.
3) Pay off your credit card debt:
Your credit utilization ratio determines 30% of your credit score which is how much debt you have in relation to your overall limit. It is better if the ratio is low. As a rule, if your utilization exceeds 30%, try to go below that threshold by paying off those dues.
4) Refrain from creating new accounts:
Opening new credit will impact upon one’s score. Before you apply for a mortgage, try not to open any new credit card accounts or take out any more loans. Throughout the application and mortgage underwriting process, keep in mind this advice. Likewise, avoid closing any outdated accounts since this will increase your use ratio and lower your score.
5) Consult a responsible credit user for assistance:
If you’re a first-time buyer who is younger, your credit history may not be that extensive. Adding yourself into the credit card of a parent or relative may be one means by which you can establish credit for buying a home. You will benefit from their good payment history however the main cardholder your parent or relative will be responsible for making payments.
In summary:
To improve your chances of getting a home loan keep closed all loans that are not in use and leave only ones that have been paid on time. This way, you will be reducing the risk associated with unused loan accounts which may help increase your loan eligibility for amount the bank finally determines.
Even though you have never borrowed any kind of loan or taken any type of credit before, it is important to build an excellent pattern of responsible utilization of credits by different means, like personal loans or credit cards. This could prove to be very beneficial if in future you plan to apply for housing Loan since bureaus develop scores based on previous borrowing histories.