How Does the Credit Information Bureau Limited (CIBIL) Calculate Credit Scores?

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Credit scores have acquired a position of vital importance. They are used to ascertain whether an individual is eligible for a loan or not. At face value, it is just a number that denotes a person’s credit worthiness. But few people know how their credit scores are calculated.

Earlier, banks used to take borrowers on their word and this proved to be a less than adequate. Quite often, good applicants would get rejected while others would get their loans approved despite several red flags. Lying on loan applications has cheated banks of crores of rupees. It also led to the proliferation of unscrupulous agents that could work their way around the system to get almost anyone approved, provided they were compensated well. Thankfully, the widespread adoption of CIBIL scores as a tool to determine credit eligibility has ended the deteriorating conditions.

The Credit Information Bureau Limited is India’s first credit rating agency. Originally, they collected credit information of companies and rated them accordingly. This helped in restoring faith and brought transparency to the financial systems. Now, a similar rating is also provided for individuals in the form of a credit score. The credit score is measured out of 900 points and gives a clear indication to the lender about the applicant’s financial abilities and behaviour.

CIBIL has its own methodology for calculating credit scores. They use sophisticated algorithms which are specifically designed for credit rating calculations. Some of the criteria they use to calculate an individual’s credit score are briefly explained here.

Repaying Loans

The credit history of an individual shows their complete financial history with credit and debt data. This data helps in categorising the individual as reliable or risky. An individual’s ability to repay loans on time contributes greatly to their credit rating. This shows that the individual in question is capable of repaying their loans. A higher score means that the person is more likely to get approved when they apply for any credit product.

Balancing the Loan

Another criterion that greatly affects an individual’s credit score is the total amount that has been borrowed and the share of the total that has been spent. If the individual spends the amount carefully, then this shows them to be responsible borrowers and spenders. On the other hand, if an individual were to fritter away the loan amount within a short period of time, they would be considered risky. Such behaviour does not bode well for loan applicants.

Loan Tenure

The duration or tenure for which a loan was active and the payments made during that time is a major contributor to a person’s credit score. A good history of timely payments without any late or skipped EMIs shows that the individual is a responsible borrower who takes their repayments seriously. This is also an indication that the person is a wise spender who does not make spending decisions in haste.

Application for New Credit

If the applicant has applied for a loan then the creditor will run a credit check. Each such check shows up in the credit history. If there are too many queries then it will negatively impact the credit score. This is generally an indication of a desperate need for funds, usually without the means to repay it. Banks are wary of such applicants and often deny them.

A Mixed Bag

If an individual keeps opting for the same type of loan or credit product over and over again, it will have a negative impact on their credit score. Therefore, it is important to have a mix of secured and unsecured loans in order to balance out one’s credit portfolio and obtain a higher credit score. This shows that the borrower’s finances are diverse and they have other financial options at their disposal.

Your CIBIL Credit Report is like your financial report card. It highlights your financial behaviour and whether you are a good investment for the lender. A good credit score speaks volumes about a person’s ability to handle and manage various types of debt including loans, credit cards, etc. Such individuals are in a position to bargain for better interest rates and other favourable terms and conditions for their loans. It is important for people who are applying for loans to ensure that their credit score is good. You can do so by requesting your won credit report. A score of 750 or above is considered to be good by banks. If they are in the red, then steps must be taken to improve it. People with low scores should avoid applying for new loans and instead work to pay off any outstanding debt first. If you find any errors in your credit history, they must be corrected. Rectifying errors as quickly as possible will improve your credit score significantly.


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