CIBIL Score: How is Your CIBIL Score Calculated?

How Is Your CIBIL Score Calculated?

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When you apply for a loan with any financial institution, your CIBIL score is important. According to statistics, candidates with a CIBIL score of 750 or higher get approved for 90% of loan applications. A better CIBIL score increases the likelihood of your loan application is approved.

Of course, each credit rating organization has its own method for computing an individual’s credit score based on several parameters. Without a doubt, you must learn how to calculate your CIBIL score before submitting your loan application to reduce the odds of it being denied.

What is the CIBIL score?

The CIBIL score is a three-digit numeric summary of your credit history calculated using information from your CIBIL report’s ‘Accounts’ and ‘Enquiries’ sections, which includes (but is not limited to) your loan accounts or credit cards, payment status, and outstanding amounts’ days past due. The score reflects your creditworthiness, as determined by lenders, based on your borrowing and payback history. Your CIBIL score runs from 300 to 900, and the higher your score, the more likely you are to be approved for a loan. Consumers with a CIBIL score of more than 750 get approved for 79 percent of loans.

Factors on which CIBIL Score Calculation Depends

The credit bureau considers the information in your CIBIL report when calculating your CIBIL score. When determining your CIBIL score, the following factors are considered:

  • Credit history: Your CIBIL score is heavily influenced by your payback history. On a regular basis, banks and other financial institutions report credit-related information to the credit bureau, such as payments toward your bills and EMIs. The status of each account on your CIBIL report will disclose whether it has been settled, written off, or left outstanding. The report will also include information about past dues (if any). If you’ve ever missed or delayed an EMI or credit card payment, it’ll show up on your credit report, lowering your CIBIL score. Always make sure to pay all of your bills on time to avoid this from happening.
  • Credit utilization: Credit usage refers to how much credit you are utilizing compared to how much credit you have available. Your credit utilization should not exceed 30% in most cases. Maintaining a lower credit use rate over time will help you improve your CIBIL score. This can be accomplished by paying more than the minimum on your credit card each month, increasing your credit limit (but not your expenditure), and applying for a new credit card (again, keep your purchases limited). If you want to reduce your credit utilization rate, you might also consider using a debit card or cash for routine expenditures.
  • Credit mix and duration: Your CIBIL score is heavily influenced by the type of credit you’ve taken – secured or unsecured – and the length of your credit history. If you have a significant amount of unsecured credit, such as personal loans and credit cards, you will be considered a high-risk borrower. A higher proportion of secured loans, such as home and vehicle loans, will help you improve your CIBIL score. If you have multiple secured and unsecured loans and are considering prepaying them, you should start with the unsecured debts. In addition, the length of time you have been servicing a particular type of credit is considered while calculating your score. If you have held a loan for a longer period of time and made timely payments on it, your CIBIL score will improve.
  • A number of hard inquiries: In addition to the factors listed above, the number of times you have asked for credit has an effect on your Credit score. Keep in mind that if you apply for new credit, the institution will do a hard inquiry on your CIBIL report to learn about your credit history. Because hard inquiries lower your CIBIL score, you should only apply to institutions where you are confident that your application will be accepted.

How is Your CIBIL Score Calculated?

The credit bureau calculates the CIBIL Score on the basis of a number of essential parameters. They are as follows:

  • Repayment History: Late payments or defaulting on your equated monthly installment (EMI) will have a negative influence on your credit score. It’s one of the most crucial criteria to consider when determining your CIBIL Score.
  • Credit Utilization: Excessive usage of credit implies that the applicant is overly reliant on credit and that any unfavorable event could cause him to fail on the loan. Lenders desire a credit usage ratio of less than 30 percent.
  • Multiple Enquiries: You come across as desperate and credit-hungry if you make multiple inquiries. Lenders are wary about approving loan applications from such people. As a result, it’s best to make a hard inquiry only when you’re certain you’ll need a loan. Regularly checking your credit score, on the other hand, falls within the category of soft inquiries and has no bearing on your credit score.
  • A number of loans applied for and approved: The Credit Bureau will keep note of how many loans you have applied for in the past and how many of those loans were approved. If you’ve been turned down for a lot of loans, it can hurt your credit score.

To create a healthy credit history, you should have a good mix of secured and unsecured credit. However, while computing your score, this factor is given a low weighting.

What is the Credit score that you should aim for?

Any CreditScore between 700 and 900 is considered optimal for loans or credit. Your loan application will have a better chance of being approved if you have a strong credit score. A credit score of 750 or more is regarded as favorable when applying for a personal loan, a home loan, or a car loan.

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