Understanding CIBIL in 10 mins

What is CIBIL?

CIBIL is India's first Credit Information Company incorporated as Credit Information Bureau India Limited, also commonly referred as a Credit Bureau. In the year 2016, Transunion acquired 82% stake in CIBIL to become Transunion CIBIL.

What is CIBIL Score?

CIBIL score is a three-digit number, ranging from 300 to 900, which acts as a measure of your credit worthiness.

The score is derived after taking into consideration your credit history and details found in your CIBIL report, which is shared by all Banks and Financial Institutions periodically and is maintained as a record by Transunion CIBIL.

Generally, a score of 750+ is considered as a good score and almost 80% of the credit disbursement fall into this category especially in the case of Secured Loans like Home Loan, Auto Loan etc.

Apart from the numeric values between 300-900, there are also other scoring values like

·        NA – When there is no credit activity in the last few years

·        NH – When there is no Credit History (usually when you are new to the credit system)

How is the CIBIL score calculated?

While the exact algorithm to calculate the score is unknown due to the trade secrets and patents owned by CIBIL, there are few weightages issued to keep consumers aware of the score composition based on an individual's credit behaviour.

·        Past Payments – History of past payments is factored while calculating the credit score and this is the most important weight taken into consideration and CIBIL has allocated 30% weightage towards this. The two most probable situation which will either increase or decrease the score are

o  Regular Repayment – In case you pay your dues regularly before the due date you can see a regular increase in your score

o  Default Payment – This impacts the score drastically and with delay in every single day, there is an increase in DPD (days past due) and it brings your score down considerably. This applies in case of Joint Loans, Add-On Cards, and Guarantor where the default by the primary applicant impacts the score of all borrowers. Similarly, non-payment arising against any dispute is also considered default E.g.: - Fraud, Annual Membership amount or any other Charges levied by financial institution

·        Credit Mix & Duration - Having a balanced mix between Secured loans (Home Loans, Vehicle Loans, etc.) and Unsecured loans (Personal Loans, Credit Cards, etc.) is likely to have a positive impact. Similarly having too many loans in a short duration will have a negative impact. However, multiple loans with longer duration impact positively.

·        Credit Utilization – This is the percentage of used credit against your total available limit. For E.g.: - Using ?90,000 from the available limit of ?1,00,000 indicates 90% usage of the credit limit and exhibits the credit hungriness behaviour. A high credit utilization limit indicates a rising debt burden over time and may negatively impact your score. Using the overdraft facility regularly also has the same impact.

·        Others – Few other elements impact the score moderately which are often ignored for having limited weightage. However, if care is taken and maintained cautiously, 20% of factored weight can boost the score considerably. Some of the elements are listed below.

How to increase your CIBIL Score?

 Your CIBIL Score plays an important role in the loan approval process. Monitor your CIBIL Score regularly to be always loan-ready so that you have access to credit when you need it the most.

A decrease in CIBIL score is not a judgement against your personal worthiness but it is only against credit worthiness at any given point of time. Therefore, never get disheartened with a low score as this number can be fixed with time and practicing financial discipline.

By following the below tips the score can be turned to “GREEN” from “RED” and things will fall back to normal.

1.      Pay all your dues on time

• Avoid skipping any dues towards loans or cards
• In case of financial distress try to pay at least the minimum due amount and clear all pending dues at the earliest once your situation improves
• Try settling any disputes with the lender ASAP and pay the agreed amount

2.      Limit Credit utilization

• Limit your unsecured loans/credit in proportion against your secured loans or total credit limit
• Limit credit card spending to less than 30% of your monthly salary**
• Limit cumulative EMI’s of all loans to less than 50% of your monthly salary**

** Percentage can vary based on individual capacity

3.      Get alternative loans/credit card to rebuild credit history

•  Take a loan against securities E.g.: - Gold Loan, Insurance Policy, Loan against deposit, etc. and settle the old debts
•  Get a credit card against FD since a normal credit card might not be issued in case of low score

4.      Monitor your CIBIL score and report regularly

• Report inaccuracies to CIBIL immediately
• Check for any incorrect open or settled accounts
• Raise dispute with CIBIL in case you cannot reach the lender

5.      Importantly be disciplined and keep patience to see the effects

Enjoy LIFE, Enjoy Money!!!