A mere three-digit number decides whether or not you can get a loan if you ever need financial assistance - is your CIBIL score. What is CIBIL score all about? Why is it important for us to know about it? How does it facilitate the smooth approval of loans? Let’s understand.
We reach out to our credit cards and loans for several reasons. They prove to be saviours at the time of the financial crisis and also help us to achieve our dreams and aspirations. Most of us who receive calls from the credit card or loan departments of banks and other financial institutions offering life-time free credit cards or enquiring whether we need a personal loan, seldom do we realise that these free offers for financial aid is not all that easy to get at times.
At the time of taking a home loan or a business loan, the long procedures and interactions that you need to go through, the endless paperwork and repeated visits to the bank to get the loan approved, make you realise that it’s not all that easy after all. The first thing it requires is to have a perfect CIBIL score. A CIBIL Score check is a mandatory procedure followed by every loan provider.
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What is a CIBIL Score?
A CIBIL Score, also known as credit score is a three-digit number between 300 to 900 that represents the credit history of an individual. By credit history, it refers to how good that person has been in repaying his loans. Based on the credit history, the credit score of an individual is deduced. The closer the score to the 900, the better it reflects upon the credit history. Lower it is towards the 300, worse it reflects upon the credit history and pulls down the chances of getting loans.
How good is the Credit Score?
The CIBIL Score range that falls within between 300 to 900 is divided into three slabs as mentioned below:
The first slab is between 300-600 which is considered to be at credit risk. Borrowers falling within this slab are not likely to get their credit cards or loans approved by banks or other financial institutes.
The next slab falls within the range of 601-750. This is the intermediate segment with permissible lending facilities, although, only after evaluating every financial aspect including sources of income, income stability, and loan security.
The third and the final slab is the mark above 750. The borrowers who fall under this segment are considered safe to be given loans. A high credit score also gives an advantage to the borrower who can use this to bargain for a lower rate of interest.
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How is CIBIL Score generated?
Whenever a person applies for a loan or a credit card, the first thing that the lender looks for is the credit score or CIBIL score of that person. CIBIL stands for Credit Information Bureau India Limited. It is the first Credit Information Company in India operational since the year 2000. It maintains the credit activity records of companies and individual borrowers related to credit cards and loans taken from banks or any other financial outfit.
CIBIL shares these Credit Information Records with the banks and other financial institutes that provide loans so that they can make an informed decision before giving the loan to anyone. Thus, CIBIL plays a significant role in helping loan providers to manage their finance efficiently.
Credit Information Record (CIR) is generated after registering and maintaining the loan repayment records of the borrowers with due diligence every month. This report is shared with banks and other financial institutes to keep them updated about their current as well as potential borrowers. CIBIL Score or credit score is generated out of this Credit Information Record or CIR. How? Read on…
Five key factors are considered before generating the CIBIL report that includes – loan inquiries, payment history, type of credit opted by the borrow, utilisation of credit limit, and new credit facilities. Securities or assets used to secure the loan are also taken into consideration. For instance, a home loan or auto loan is secured by some other house, fixed deposit, or financial investment that is expected to mature in near future.
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Factors That Affect Your CIBIL Score
Several factors impact your CIBIL Score. And if you are aware of it, you can maintain a very good CIBIL Score just by being a little mindful about these factors.
Repayment Schedule – When it comes to repaying the loan, it is important to discipline. If you have taken money from someone, you have to repay it. There are no two ways to it. Hence, make sure that you have the re-payable amount ready in your bank account every month before the payment date arrives.
Credit Utilisation Ratio– Credit Utilisation Ratio is obtained by dividing the amount of credit availed by the credit limit available to the borrower. The higher the credit utilisation ratio, the lower it brings down your creditworthiness.
Application for Loans and Credit Cards– Every time you apply for a loan or credit card, you have to go through an inquiry that reflects on your CIBIL report. More such inquiries are detrimental to your CIBIL Score.
Loan Types you have opted for– It is advisable to have a mix of secured as well as an unsecured loan. Having too much of an unsecured loan reflects badly on your CIBIL Score. Secured loans include our home and auto loans while our credit card loans are unsecured.
Having No Credit History– It is understandably difficult for a loan provider to evaluate the credibility of a potential borrower with no credit history.
Failing as a Loan Guarantor– This happens when you have been a guarantor for some borrower who has turned out to be a defaulter. In such circumstances, the guarantor is black-listed by loan providers.
There are several parameters that CIBIL takes into account while preparing the CIBIL Report of a person or company. Having in-depth knowledge about it places you in a better position to claim your rights as a borrower.
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Q. How to do a CIBIL Score check online?
A. CIBIL Score can be accessed online through CIBIL’s official website after providing KYC documents and a fee.
Q. Can I check my CIBIL Score for free?
A. As per the regulation passed RBI, CIBIL gives access to the full credit report of a person once a year for free. You can avail of this service from CIBIL official website at any time of the year.
Q. Can I improve my CIBIL Score?
A. Yes, of course, and it begins with paying your EMIs on time. Consult your financial advisor from time to time to understand how you can manage your debts better.