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.