Whether you want to purchase a new house or car, most people prefer taking a loan rather than shelling out all their savings to fund the purchase. Your lenders assess your creditworthiness before disbursing the loan amount.
A credit score is an integral part of your assessment. This three-digit number helps lenders know the following:
- In the case of a loan, the amount you are eligible for
- in the case of a credit card, the upper limit for the card
- Whether or not you should mortgage for the loan you are availing
Five pillars help determine the credit score. This article will take you through the advantages of calculating a credit score. We will also discuss the CIBIL score calculation in detail.
What is the CIBIL Score?
CIBIL (Credit Information Bureau India Limited) is an RBI-licensed company. It provides credit information for individuals. It is the most popular credit-scoring company in India.
- This is a three-digit credit history summary.
- It includes ratings and reports that detail your creditworthiness
- The score ranges from 300-900. You are in the good credit bracket if your score is nearly 900.
A credit report in CIBIL helps the lenders see the following details:
- The number of loans you have taken
- Whether or not you pay them on time
- The total number of accounts you hold
It takes approximately 18-36 months to build a satisfactory CIBIL credit score.
Why Should You Worry About CIBIL Score?
The CIBIL score is an important part of your loan application. Most lenders have automated systems that help them assess you as the lender. The credit score is part of this algorithm.
It helps create the first good impression on the lender. Let’s discuss the advantages of a credit score.
- Based on the risk determined from your profile, the lenders determine the loan amount along with the interest to be paid.
- A higher credit score helps you get loans faster.
- With a good score, you can negotiate better with lenders. Whether you want a shorter repayment term or more loan amount, it is possible with a good credit score.
- Lenders may think twice before releasing the amount they want if you are on the riskier side of the credit score. However, your chances of getting the deal are higher with a good credit score.
- A good credit score has its perks with credit cards. You get the best higher limit with the cards as well.
- Banks also offer you pre-approved loans when you have a higher credit score.
- The repayment period can also increase if you have a better CIBIL score.
How is CIBIL Score Calculated?
As discussed, there are five pillars to your credit score. Each pillar is assigned a specific value. Together, they help determine if you are worthy of the loan.
- The Payment History
This accounts for 35% of the score. This element helps the lender understand
- Do you make your payments on time?
- Have you skipped your EMIs in the past?
- If you delay your payments by 30 days, it can impact your credit score.
- If there are more accounts with delayed payments, it can affect the score.
To ensure a positive score, in this case, you should provide timely payments. If possible, it should be
- Existing Debt
This makes up 30% of the score. It accounts for the total credit limit you have utilized and the total loans you have taken.
- It includes the total loans you have taken for different purposes
- It also assesses the credit cards you own and how much you owe
- If you have maxed out your credit card, it can impact your credit score.
- If you have taken new loans with low repayment history, it can hamper your credit score.
- If you have loans closing soon, you might notice an increase in your credit score.
- Credit History Duration
This accounts for 15% of the credit score when you opt for a free CIBIL score check. If you have a long and good history of making timely payments, you may notice a slight hike in your score.
The score averages the age of your credit to determine your worthiness for getting a loan. While you may want to avoid debts, they can help lenders learn more about your credit score.
- The Credit Mix
This is an essential part of calculating the credit score. You might be considered risky if you have more personal or credit card loans in your history. On the other hand, if you have home or auto loans, it can improve your score. It is a good idea to have a good credit mix for better assessment.
Along with the credit mix, the duration of the loan also matters. If you have repaid your loans using a longer term, you might notice an increase in your score. The credit mix accounts for 10% of the credit score.
- Recent Activity
This sums up the final 10% of the CIBIL score. Say you applied for a credit card recently and got rejected. This can impact your credit score negatively. Similarly, if in the recent past you opened a few bank accounts, it can impact your credit score.
Your recent activities also affect the score and play a pivotal role in the algorithm. However, it is important to note that the algorithm does understand that a person with new accounts or loans is not necessarily risky.
Several sites allow you to conduct a free CIBIL score check to assess your creditworthiness. The ideal CIBIL score for better worthiness is between 750-900.
Note: You must pay a nominal amount to check your CIBIL score by PAN card.
Creditworthiness is pivotal in approvals, whether you plan to take home or personal loans. You can get your loans approved and disbursed faster with a higher credit score. It can also act as a catalyst for better interest rates and payment terms.
You should follow basic credit rules to ensure a better score. If you want to know more about improving your CIBIL score calculation or enhancing financial planning, visit us at Piramal Finance. We make sure your financial knowledge is up to date on essential services and products, such as personal loan and financial calculators, by reading the informative blogs on their website.