What is a CIBIL score? And how to improve that Immediately?
Created on 15 Sep 2020
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Updated on 16 Sep 2023
Imagine you're in your college. You get a good amount of pocket money, which is more than your monthly expenses; hence you always end up saving some money in the end. Now imagine two of your classmates come to you on different days and ask you for some money. Now, since you only have limited savings, you can afford to help out only one of them. How do you decide whom you will lend the money to?
This is where their credit score will come to play. Now, for a college student, the decisive factors may include a lot more emotions and personal biases instead of just their past lending behavior and market reputation. Still, it cannot be the case for a bank or company that runs in the market. They lend money to people based on a numeric score that can put an individual on a considerable scale.
This numerical value is based on the past credit behaviors of a person and depicts their creditworthiness. It is known as the credit score.
A credit score is a three-digit numerical value that suggests an individual's creditworthiness. It plays a key role for lenders to decide their potential borrowers. Lenders tend to use an individual's credit score to determine if they will repay the loan on time or not. The higher the score, the better is an individual's chance to get money from a lender. A credit score is based on a person's credit history, which includes factors such as the number of open accounts, total levels of debt, repayment history, and other factors.
In India, there are several credit bureaus that can provide credit scores to people and companies. These bureaus are known as credit-rating agencies that calculate people's credit scores and are regulated by the Securities and Exchanges Board of India (SEBI). Some of India's major rating agencies include Experian, CRIF High Mark, Equifax, Credit Rating Information Services of India Limited (CRISIL), ICRA Limited, Credit Analysis and Research Limited (CARE) the TransUnion CIBIL, etc.
TransUnion CIBIL Limited, formerly known as Credit Information Bureau (India) Limited (CIBIL), is a credit bureau or a credit rating agency that maintains the records of all the credit-related activities of companies as well as individuals, including credit cards and loans.
What is a CIBIL Score?
The CIBIL score is the credit score that is provided by TransUnion CIBIL. It is a numeric, three-digit credit summary that reflects a person or a company's credit profile and history, and it ranges from 300 to 900.
Although all credit agencies are licensed by the Reserve Bank of India to calculate the credit score, the CIBIL score is the most commonly used and preferred credit score by banks and other financial institutions. The difference between the CIBIL score and a credit score is that any credit agencies can provide a credit score, but only CIBIL can give a CIBIL score.
According to the CIBIL, any score that is greater than 750 is a good CIBIL score and helps the lenders to assess and approve loan applications. The CIBIL score of an individual is derived from their CIBIL report, which includes data such as borrowing and repayment habits, which is submitted by banks and other lenders with CIBIL on a regular basis.
The past behavior of a borrower is considered as an indicator of his future behavior as a borrower. Examining and studying the CIBIL score and report is usually the first thing any lender would check before approving any loan.
But why is it so important to have a good CIBIL score or why is it so important to improve the CIBIL score?
Advantages of having a good CIBIL score
CIBIL is the most trusted credit agency of India, as its results are considered as the most accurate among all credit rating agencies. A good or high CIBIL score is suggestive of good and responsible management of a company's finances and a person. Hence, it is important to improve your CIBIL score and maintain it at a high value.
Apart from easy approval of loans, having a good CIBIL score entitles a borrower to a number of perks. Some of the advantages are as follows:
- Lower interest rates: People with a good CIBIL score get loans at lower interest rates. Those with lower CIBIL scores are generally charged with high rates of interest.
- Fast loan approvals: Good CIBIL score reflects you as a good borrower in a lender's eyes. Hence, banks try to approve loans as fast as possible. People with lower CIBIL scores have to submit a number of documents and have to go through a long process to get their loans approved.
- Easy credit: As mentioned, a high CIBIL score is an indicator of good financial management by a person or a company, and thus lenders tend to be more trustworthy towards such people.
- Negotiation authority: People with high CIBIL scores get the authority to negotiate with banks/financial institutions to negotiate for a lower rate of interest.
- Higher loan limit: A high CIBIL score can help you get get a higher limit on the amount of loan that you can borrow, that too at a low-interest rate.
- The credit card offers: Banks generally tend to provide exciting offers and schemes to people that have a good CIBIL score.
How can you improve your CIBIL score?
Now that you know what a good and high CIBIL score can get for you, you must be wondering how you can improve your CIBIL score. If you have a low score, below are some measures that can help you improve your CIBIL score:
1. Check your credit report regularly.
You must have a habit of checking your credit or CIBIL reports regularly. A CIBIL report will help you identify the factors which have brought down your CIBIL score. These factors usually include unpaid or delayed loans. This identification makes you evaluate your personal CIBIL report and helps you spot errors in it. In case you need to correct information, you can contact the mentioned bank or financial institution and get that error rectified.
2. Clear credit card balances.
Another thing to improvise a CIBIL score is to clear out the balance in your credit cards. Balances also include unpaid dues on loans and EMIs, which can bring the CIBIL score down. Contact the lenders/banks and pay off any outstanding dues. This way, one can improve their CIBIL score.
3. Clear out inaccuracies in the CIBIL report.
It is important to keep reviewing your CIBIL report from time to time in order to keep a check on the information that is being put on there. In case you see any inaccurate detail, it is important to get it rectified immediately, so as to avoid getting your CIBIL score hampered.
4. Keep a check on your credit utilization ratio.
Avoid using your credit cards for every transaction you make. It is important to keep your credit card utilization ratio below 30%, as keeping your monthly balances low can reflect a healthy CIBIL score.
5. Increase your credit card limit.
You can ask your banks to increase your credit limit, usually for credit cards, to have more credit available for your use. This does not mean having to spend it all beyond your capacity. Having a high credit card limit and a low credit utilization ratio can be reflective of a responsible borrowing behavior and can thus lead to a positive CIBIL score.
6. Keep a check on joint credit terms.
If you are the joint application for a loan that has been taken by someone else, you should keep a regular check on the repayment of that loan. In case they have missed on payments, then you will also end up lowering your CIBIL or credit score, as this will reflect in your report as well. The best way to avoid this is to ensure that the loans and cards are being paid off on time. It is usually advised that one should limit themselves from applying for joint credit terms.
The CIBIL score is a value that should always be high, and the CIBIL report is like a report card that is a reflection of your past performance and behavior as a borrower. It is the parameter that establishes trust between you and your lender by ensuring that you will repay their lent money on time.
Getting a loan in today's times is like a boon as it enables you to get a step closer to monetary happiness. But, getting a loan approved in the current times can be difficult if you don't have a good credit history. The CIBIL score puts a numeric value to your credit behavior and is reflective of your trustworthiness. Thus, it is important to improve your CIBIL score in case it is low and retain its value, in case it is high.
Some basic measures and simple responsibilities can help you put on a healthy image in front of the market and get you closer to getting what you desire; be it a car you want, a house you wish for, wanting to study abroad, or a business you want to start.
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