How is your CIBIL score calculated?

Imagine applying for a loan or a credit card, and the lender asks you for your CIBIL score. You have no idea what it is or how it is calculated. You panic and wonder if you have a good or bad score. You wish you had paid more attention to your credit history and habits. Well, don’t worry because we are here to help you. In this article, we will explain what a CIBIL score is, how it is calculated, and how you can improve it. A CIBIL score is a number that tells lenders how trustworthy and responsible you are with credit. It ranges from 300 to 900, with 900 being the best possible score. The higher your score, the more likely you are to get approved for loans and credit cards, and the lower the interest rates and fees you will have to pay. But how do you get a high CIBIL score? What are the factors that affect it? And what can you do to boost it? Read on to find out.

How Is Your CIBIL Score Determined?

Your CIBIL score is determined by four main factors that reflect your credit behaviour and history. These factors are:

Payment History

This is the most important factor, accounting for about 35% of your CIBIL score. It shows how timely and consistently you pay your loan EMIs and credit card bills. A history of making payments on time will boost your score.

Credit Utilisation

This is the second most important factor, accounting for about 30% of your CIBIL score. It shows how much of your available credit limit you are using on your credit cards.

Credit Mix and Duration

This factor accounts for about 25% of your CIBIL score. It shows the types and duration of credit accounts you have. A healthy mix of secured and unsecured loans, such as home, car, personal, and credit cards, can improve your score, demonstrating that you can handle different kinds of credit responsibly.

Other Factors

This factor accounts for the remaining 10% of your CIBIL score. It includes aspects such as

• the number and frequency of credit inquiries you make,
• the number and severity of negative remarks on your credit report, such as settlements, write-offs, or legal actions, and,
• the diversity and recency of your credit activity.

To summarise, the steps to determine your CIBIL score are:

• Step 1: Your payment history is checked to see how timely and consistently you pay your loan EMIs and credit card bills. This accounts for 35% of your score.
• Step 2: Your credit utilisation ratio is calculated to see how much of your available credit limit you are using on your credit cards. This accounts for 30% of your score.
• Step 3: Your credit mix and duration are evaluated to determine the types and duration of your credit accounts. This accounts for 25% of your score.
• Step 4: Other factors, such as the number and frequency of credit inquiries, the number and severity of negative remarks, and the diversity and recency of your credit activity, are also considered. This accounts for 10% of your score.

The Perfect CIBIL Score to Aim For

As a general rule of thumb, a CIBIL score of 750 or above is considered excellent and can open the doors to many attractive offers and benefits. For instance, a score of 700 to 749 is also good and can help you secure loans and cards at reasonable rates. Moreover, a score of 650 to 699 is fair and may require you to pay higher interest rates or provide additional documents. Furthermore, a score below 650 is poor and can make getting approved for any credit product difficult. Therefore, aiming for a high CIBIL score and maintaining it by following good credit habits is advisable.

Things That Can Change Your CIBIL Score

Your CIBIL score can change over time depending on how you manage your credit. Here are some of the factors that can affect your CIBIL score positively or negatively.

• Timely payments of your EMIs and credit card bills show your responsibility and commitment.
• Credit utilisation, which is the percentage of your available credit limit that you use.
• Credit mix is the variety of your credit products, such as loans and cards.
• Credit inquiries are the requests made by lenders or others to check your credit report or score.
• Other factors include errors or discrepancies in your credit report, changes in your personal information, settlement or write-off of your accounts, etc.

How Do You Clear Your Name From the CIBIL List of Late Payers?

Here are some steps to clear your name from the CIBIL list of late payers and boost your CIBIL score:

Check your credit report

Get a copy of your credit report from CIBIL and check it for any errors or discrepancies. Sometimes, your credit report may contain incorrect or outdated information, such as wrong personal details, duplicate accounts, or settled accounts still showing as outstanding.

Clear your outstanding dues

Pay off all your outstanding dues as soon as possible. Your payment history is the most important factor influencing your CIBIL score, accounting for 35% of the weightage. If you have missed or delayed your payments in the past, it will reflect in your credit report and lower your CIBIL score.

Do not exceed your credit limit

The credit utilization ratio is the percentage of your total available credit limit that you use. A high credit utilization ratio can lower your CIBIL score, indicating that you are over-dependent on credit and may face difficulties repaying your debts. You should reduce your credit card spending, pay your bills in full monthly, and increase your credit limit if possible.

Do not apply for multiple loans or credit cards simultaneously

Every time you apply for a loan or a credit card, the lender makes a hard inquiry on your credit report to check your credit score and history. A hard inquiry can lower your CIBIL score by a few points, indicating that you are seeking new credit. Too many hard inquiries in a short period can lower your CIBIL score significantly, as they imply that you are credit-hungry and may face financial stress.

Maintain a healthy credit mix

Your credit mix is the diversity of your credit portfolio, which consists of different types of credit products such as secured loans (home loans, car loans, etc.), unsecured loans (personal loans, credit cards, etc.), and revolving credit (overdraft, line of credit, etc.). A balanced credit mix can enhance your CIBIL score, demonstrating your ability to handle different kinds of credit obligations.

Conclusion

Mastering your CIBIL score may seem like a tough challenge, but you can consider it an exciting adventure in finance. Every time you pay on time, you strengthen your shield. And when you use credit wisely, you have a powerful weapon to overcome any obstacle. By learning the key factors that shape your CIBIL score and applying the techniques to boost it, you’re not just enhancing a number but preparing the ground for your financial dreams to take off. From getting loans with the best terms to being the favorite customer of credit card companies, the rewards are as amazing as the journey itself.