- HOW IT WORKS?
- Credit Score & Report
- Credit Bureaus
Whenever an individual applies for a loan, the most primary thing that is checked by the lender is the CIBIL Score of that individual. CIBIL is the abbreviation for Credit Information Bureau India Limited. A CIBIL Score is a three-digit number that explains the creditworthiness of an individual. The CIBIL Score is a score that fluctuates from 300-900. Here 300 is the least credit score that belongs to an individual and 900 is the highest credit score that belongs to an individual. A credit score that is above 750 is considered to be a good score. Higher the credit, higher is your chances to get a loan.
Many Credit Bureaus calculate CIBIL score. CIBIL Score is calculated by keeping mind many important points and factors that affect the CIBIL Score. This effect could be either increasing or decreasing the CIBIL Score. For unsecured loans like personal loans, the borrowers can also you can even bargain for a lower interest rate if you have a high credit score. It is not implied that a loan application will be not get rejected if the credit score is good.
How is the Calculation of CIBIL Score Done?
CIBIL Score is calculated by considering the following factors. The CIBIL Score is directly and sometimes indirectly defendant on these factors.
- New Credit Application
- Appropriate Mix of Credit
- Repayment History of the Loan Applicant
- Credit Balance
- Duration of Using the Credit.
1. New Credit Application: This factor contributes around 10 % to a CIBIL Score. Whenever a borrower applies for a loan, the lenders go for a credit check. In this process, if the lender finds that there are lots of queries that have been made, then there is a negative impact on the credit score.
2. Appropriate Mix of Credit: This factor contributes another 10% accounts to a CIBIL Score. If you do not have a proper mix of credit, there will be a negative impact on your CIBIL Score. It is important that you maintain a proper mix of secured and unsecured loans. Having more than one type of credit will help an individual in increasing the CIBIL Score.
Example: Having a proper mix of car, education, personal, home and gold loans will result in increasing your CIBIL Score.
3. Repayment History of The Loan Applicant: This factor contributes around 35% to a CIBIL Score. Thus it is very crucial for a borrower to clear off their loans and bills before the due date has arrived. This will help them in maintaining a good CIBIL Score. If an individual has defaulted once also, there will be a negative impact on the score.
4. Credit Balance: The amount that a borrower has taken from the lender constitutes around 30% of the CIBIL Score. This factor is split into two components.
- Credit Limit Sanctioned
- Ratio Of Credit Utilization
5. Duration of Using the Credit: This factor contributes 15% to a CIBIL Score. If the loan taken by a borrower has been maintained for a longer duration and all the payments have made on proper time, then there will be a positive impact on the CIBIL Score.
A CIBIL Report and Score are helpful in checking if a borrower qualifies for a loan or not. If the credit score of an individual is higher, the chances are that the individual can avail the loan faster and at better terms that favour that individual. An individual should make it a rule in their mind that they continuously check their CIBIL Score and Report prior to applying for a loan. The most basic factor that helps in maintaining a good CIBIL Score and Credit history is making the payments of the EMIs of Loans on proper time.
CIBIL also provides with a loan calculator. This can be used as a guide prior to the application of any loan. The loan calculator will help an individual in understanding the exact amount of loan that individual is eligible for and also the EMI that should be paid by that individual. This in turn helps in assessing the loan suitable for a particular individual and then approaches the lender.
Pros of CIBIL Score Calculation
- If an individual has a high CIBIL Score, the bank that has lent money to the individual will have complete confidence. This helps in getting the loans sanctioned at a faster pace and is also helpful in saving a lot of time of the lender as well as the borrower.
- When an individual pays their credit card as well as loan balances at the proper time, a good financial discipline is followed. By doing this, the CIBIL Score gets built up to a good score and there will no troubles for the individual in future. A good CIBIL Score will facilitate having all time credit availability option.
- Having a good CIBIL Score makes it easy for a borrower to bargain with the lender for charging a lower rate of interest rate.
- The calculation of CIBIL Score often tends to bring in transparency between the borrower and lender.
Cons of Credit Score Calculation
- By having the credit report easily available online, it becomes easy to steal the details of credit related to an individual. So, there is difficulty in keeping the information confidential.
- It is normally seen that all individuals heavily depend on the CIBIL Score for the loan approval, so if there is even one dispute, the future aspects of credit get hampered.
- It takes much time to repair a score and make it a good score. It usually takes more than 20 days to a month to get the errors corrected.
- It feels very bad if your CIBIL Score comes down because you were a guarantor to an individual who defaulted a loan. There is no fault of yours in this situation and this is when it feels helpless.
Having a good CIBIL Score alone is not sufficient for getting a loan. The lenders also check for the borrower’s ability to repay the loan before granting the loan.
A CIBIL score is like a mirror to the credit health of an individual. For, the credit score calculation by CIBIL is totally based on the history of your loans and repayments. The high score indicates high credit worthiness while the low score manifests low worthiness to pay back the loan.
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