How CIBIL Score is Calculated | A Step-by-Step Guide

Your creditworthiness or your ability to repay a loan on time is determined by your CIBIL score. The CIBIL score is one of the essential factors to consider when taking a loan. As a borrower, you should maintain a good CIBIL score to avail better loan offers including lower interest rates, higher loan amounts, flexible tenure, etc. However, it is also essential to have an idea of the CIBIL calculation and the correct way to read your CIBIL report. Read on to learn how to calculate CIBIL online. 

What is a CIBIL Score?

CIBIL score is a number that reflects your ability to repay the loan you have borrowed. Leading credit agencies in India determine your creditworthiness based on your past credit history and financial behaviour. 
CIBIL score is a 3-digit number and ranges between 300 to 900. A score close to 900 showcases your strong credit management ability while increasing your chances of loan approval. An excellent CIBIL score can also make you eligible for attractive loan offers. 

Why is Your CIBIL Score Important?

Your CIBIL score helps financing providers assess your creditworthiness before providing you with loans or credit cards. However, it is as important for borrowers as it is for lenders. Read the following 5 points to understand why calculating your CIBIL score is important: 

1.    Risk Assessment
Your CIBIL score is influenced by various factors such as credit history, repayment behaviour, etc. Lenders use this information to assess the risks associated with extending you the credit. This in turn helps them to make informed lending decisions. 

2.    Demonstrates Borrower's Credit Status
A good CIBIL score reflects your ability to make time repayments, showcasing your strong credit management ability. However, a borrower having a lower CIBIL score is often considered a risky applicant. That is because a lower CIBIL score signifies that you have a poor ability to manage your finances, hence you end up facing loan rejections. 

3.    Loan Approval 
With a very good CIBIL score, you may experience a seamless loan application. Most financing institutions grant minimal documentation requirements and simple eligibility criteria to individuals having excellent credit scores. This enhances your chances of loan approval. CIBIL score calculation can help you understand your creditworthiness for a new loan approval.

4.    Improved Loan Terms
With a high CIBIL score, you can be eligible for lower interest rates on loans and credit cards. Additionally, many leading financing institutions provide better loan terms to individuals with high CIBIL scores. You may also enjoy the repayment flexibility, as most financing providers offer a repayment tenure of up to 48 months. 

5.    Negotiating Power 
A good CIBIL score increases your negotiating power when applying for loans or credit cards. Based on your strong credit profile, you may be able to negotiate better loan terms with your lender and opt for lower interest rates or waived fees. 

How to Calculate CIBIL Score?

The CIBIL score is a three-digit number that is within the range of 300 and 900. If you have a higher CIBIL score, the lender will know that you are financially stable and you will most likely pay back the loan in time. A high CIBIL score makes you a low-risk borrower in the eyes of the lender. So, you have better chances of securing a loan, and that too at a comparatively lower rate of interest.
Below is a table that will help you understand the CIBIL score range and how it affects your creditworthiness and chance of loan approval:

CIBIL Score	Creditworthiness	Chances of Approval
Under 600	Very poor	Very low
600-649	Poor<	Low
650-699	Average	Moderate
700-749	Good	High
750 and above	Excellent	Very high

Use the 'Free Credit Score Checker' offered by Poonawalla Fincorp, to check where you stand when it comes to creditworthiness. However, keep in mind that having a high credit score does not automatically clear you for a loan. It just means that the likelihood of you getting a loan for a lower interest rate is high.

How to Read Your CIBIL Report or Credit Report?

The CIBIL report is important to understand your credit profile and identify any errors that may impact your creditworthiness. So following the steps below can help you to read your CIBIL report. 

• Step 1: Review your personal information first by ensuring that no wrong details have been added regarding your name, gender, DOB or PAN number. 
• Step 2: Next, verify the information about your credit accounts, loan amount, credit balance, and payment history to avoid any discrepancy. 
• Step 3: Review the inquiries made by your financing providers for a new loan application. 
• Step 4: Cross-check your personal details, account information and inquiries in your credit report to correct any inaccuracies.

What are the Four Most Important Sections in Your CIBIL Report?

The Credit Information Report (CIR) provided by the Credit Information Bureau India Limited (CIBIL) consists of different sections that signify your creditworthiness. However, the four most important sections in the credit report provide detailed information about you as a borrower. Read below to learn about these important sections: 

1.    Credit Summary
This section in the credit report highlights the different kinds of credit accounts you currently have or the ones you had in the past. Your credit summary also includes details regarding the balance of each credit account. 

2.    Account History 
This section includes important details related to your credit accounts such as the name of the lenders, the type of credit line, principal loan amounts, current balance, date of recent payment, etc. 

3.    Profile Information
This section brings special attention to your lenders and is significant in determining your overall creditworthiness. It highlights your big financial mishaps including bankruptcies or criminal arrests. 

4.    Credit Inquiries 
Each time you apply for a credit card or a new loan, an inquiry is generated in your credit report. The occurrence of multiple inquiries indicates that you have made many loan applications in the past. This discourages your potential lenders from extending you the credit. 

How Does CIBIL Compute Your Credit Score?

CIBIL computes your final credit score by assigning weightage percentage to various factors such as your credit balance, repayment history, etc. Read below to learn the computing process used by CIBIL to determine your creditworthiness:

• Repayment History- 35% of Your Score 

Your repayment history is based on your capability to manage your credits. To maintain this weightage percentage, it is recommended to make timely repayments. 

• Credit Utilisation and Balance- 30% of Your Score

Using a lesser amount than your sanctioned credit limit is a great strategy to improve your creditworthiness. It is recommended to maintain a credit utilisation ratio of under 30%. 

• Repayment Duration- 15% of Your Score

This section is determined by your ability to make timely repayments. Responsibly managing your credits and repaying the principal amount earlier positively impacts your credit score. 

• New Credit Lines- 15% of Your Score

Multiple inquiries about new credit lines can negatively impact your credit score. Keep your credit inquiries limited to avoid being considered a risky borrower. 

• Credit Mix- 10% of Your Score

A healthy credit mix including both secured and unsecured loans can help to improve your credit score. It reflects that you can responsibly manage different kinds of debts, hence increasing your chances of a new loan approval. 

ALSO READ :- CRIF Vs CIBIL: Explore the Major Difference

Why Do Lenders Check Your CIBIL Score Before Approving Your Loan?

Lenders check your CIBIL score before providing you with a line of credit for different reasons. So read the following 5 reasons to understand why CIBIL score assessment is important for lenders:
1.    Your CIBIL score helps your lender check your credit history and past borrowing records. 
2.    CIBIL score helps lenders review your credit balance and assess the risk involved with providing you with the credit. 
3.    With the help of your CIBIL score, lenders can evaluate your capability to repay debts on time. 
4.    Lenders also use your CIBIL score to decide on the amount of loan amount and applicable interests you are eligible for. 
5.    It helps them judge your qualifications for the credit line. 

Factors That Affect Your CIBIL Score

The exact method of how to calculate CIBIL score is quite complex and uses several factors. This method is proprietary information and is therefore not publicly available. While the specific details of the scoring calculations remain undisclosed, the credit bureau adds weightage to certain factors of your credit behaviour. TransUnion CIBIL then calculates your credit score based on how well you have performed in the below factors:

Factors	Weightage
Credit History	30%
Credit Exposure	25%
Credit Mix	25%
Other Factors	20%

 Let us look at each of these factors of how to calculate CIBIL score in detail:

1.    Credit History
This is the factor that has the most significant impact on your credit score. With a high weightage of 30%, it looks into the number of payments you have made and whether you have done them on time. In case you delay your EMI payment, know that your credit score will be affected adversely as you will be perceived as being financially irresponsible. That is why you should be diligent with your loan repayments.
In case you are having trouble keeping track of all your loans, you can consider consolidating your debt. By consolidating your debt, you can combine multiple loans into a single loan with a lower interest rate or more manageable repayment terms. This can help simplify your payments and make it easier for you to stay on top of your financial obligations.

2.    Credit Exposure
Credit exposure or credit utilisation ratio refers to the amount of credit you have used compared to the total available to you. Ideally, your credit utilisation ratio should be below 40% for a favourable CIBIL score. In case this number is higher, the lender may perceive you as a high-risk borrower and reject your loan application, further lowering your credit score.
You can avoid over-borrowing of funds and spend only within your means to maintain a healthy credit utilisation ratio. Also, you can keep checking your CIBIL score from time to time. If it is too low, you can make changes to your spending habits to get the score back on track.

3.    Credit Mix
A credit mix means having a variety of credit accounts such as secured and unsecured loans, credit cards, etc. By managing multiple streams of credit responsibly, such as by paying bills on time and keeping utilisation low, you demonstrate good financial habits. When you also take on secured loans that typically have a long tenure spanning years, it shows your ability to handle long-term commitments.
Maintaining a mix of different types of credit accounts and responsibly managing them over time can lead to a positive credit history, improving your CIBIL score and increasing your chances of being approved for future credit applications.

4.    Other Factors
This section comprises the number of active loans you have and the loan applications you have made. If your CIBIL report shows more than seven active loans, it shows the lender that you are heavily dependent on credit and thus a high-risk borrower. So they may be reluctant about giving you a loan.
Also, whenever you apply for a loan, the lender enquires your credit score. This is known as a ‘hard enquiry’ and hurts your CIBIL score. If you already have many active loans and keep applying for more, the chances of rejection get higher and further affect your CIBIL score. That is why it is recommended that you do not apply for multiple loans within a short period.

How Does Outstanding Debt Affect Your Credit Score?

Outstanding loans or debts can significantly influence your credit score, which can also impact your overall creditworthiness and ability to access favourable loan terms. Read further to have an in-depth understanding of how outstanding loans can affect your credit score: 

1.    Credit Utilisation Ratio
Outstanding loans or balances on your credit card raise your credit utilisation ratio. A high credit utilisation ratio indicates that you are using a large percentage of your available credit, which can negatively impact your credit score. On the other hand, a lower credit utilisation ratio, ideally below 30%, reflects your ability to manage credits responsibly and positively influences your credit score. 

2.    Debt-to-Income Ratio
Lenders may also consider your debt-to-income ratio (DTI) when evaluating your creditworthiness. Outstanding loans can increase your debt-to-income ratio signifying that your debts are higher than your income. 
A high DTI can also suggest poor management of debts. This can negatively impact your credit score and make it harder for you to get approved for new credit. 

3.    Payment History
Any outstanding debt that is past due or in default can lead to late payments, and lenders can report this to credit bureaus. The information can stay on your credit report for up to 7 years, significantly lowering your credit score. 
However, consistently making timely payments on your outstanding debt can help maintain a positive payment history and improve your credit score. 

4.    Length of Credit History
Having older accounts with a positive payment history can positively impact your credit score. However, having too many outstanding loans on your newer accounts can generate hard inquiries that may eventually lead to a negative credit score. 
So keeping your older accounts open can help to maintain a long credit history, which can positively impact your credit score.

To Conclude

By understanding how to calculate your CIBIL score and read your CIBIL report effectively, you can make informed decisions about managing your credit and achieving your financial goals. Additionally, regularly monitoring your CIBIL report allows you to correct any inaccuracy and take steps to maintain or improve your creditworthiness. So check your CIBIL score online for free with Poonawalla Fincorp and apply strategic approaches to improve it. 
Now you know how to calculate CIBIL scores and the factors affecting them. By taking these steps, you can improve your creditworthiness, increase your CIBIL score, and open doors to better financial opportunities in the future. 
Use the 'Free CIBIL Score Checker' of Poonawalla Fincorp to determine and improve your score and get an instant approval for all your loan applications.

Frequently Asked Questions About CIBIL Calculation

1.    Is a score of 722 a good CIBIL Score?
Yes, a CIBIL score of 722 is considered good. It indicates a reasonably healthy credit history and increases the chances of loan approval.

2.    How much time does it take to improve the CIBIL Score?
Improving your CIBIL score is a gradual process that typically spans from four to twelve months, depending upon your repayment history. To improve your CIBIL score, establish a positive repayment pattern.

3.    What is the maximum CIBIL score in India?
The CIBIL score for an individual spans from 300 to 900, with 900 being the highest possible score. 

4.    Is my credit score calculated daily?
No. Typically, most banks and lending companies submit an individual's information to CIBIL every month. Using this data, CIBIL prepares a monthly report and score that assists lenders in determining individuals’ creditworthiness.

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