CIBIL Score Explained: How It Works & How to Improve It

When you apply for a loan or a credit card lenders don’t just look at your income. They want to understand how you have handled credit in the past. That is where your CIBIL score matters.

A CIBIL score is a three-digit number that tells about your credit history, how you have handled credit in the past, how responsible you have been or how many times you have missed payments. A higher CIBIL score will just increase your chances of getting approved, while with a lower score can make borrowing difficult, this totally depends on the lender.

The good thing is that a credit score is not fixed forever, we can improve it by taking certain steps, such as paying your EMI’s on time, managing your credit card balances well, and keeping yourself a record of checking your credit report. You can work towards achieving a healthier credit profile. In this blog, we’ll discuss what a CIBIL score is, how it works and what are the steps that we can take to improve it.

What Is a CIBIL Score?

A CIBIL score is a three digit score ranging between 300 to 900 that tells about an individual’s credit history. It is calculated by a TransUnion CIBIL, It is a credit information company in India, that uses information in your credit report, it has your loan repayment history and your credit usage too.

Lenders use this score to interpret your application for personal loans, home loans, credit cards and other forms of credit. Generally, a higher score indicates a strong credit history, which will increase your chances of getting approved for a loan. But, understand that CIBIL score is not the only factor that is considered, lenders check your overall financial profile too, which includes your income, any financial obligation, employment stability and sometimes lenders own eligibility criteria.

You can understand through this table, this is presented as a general guidance, not as a universal loan approval rules.

These ranges are a simplified guide for the lenders. Different lenders might use a different ranges of cut offs and assessment criteria, so a particular score will not guarantee your approval or rejection.

How Does a CIBIL Score Work?

The ways in which a CIBIL score work is are:

• Your credit information is reported: The banks and other credit institutions share your information about the loans, credit cards and repayment behavior, and all these information is stored in the credit information companies 
• Your complete credit history is assessed: The information in your credit report is assessed completely and it is used to calculate your overall credit score 
• Lenders will review your profile: The lenders will review your profile when you apply for a loan, lender will go through credit score, and credit report along with your income, repayment capacity and other eligibility requirements

To be clear, a CIBIL score is an assessment of your credit behavior, not a result of your overall financial wealth.

What Affects Your CIBIL Score?

• Payment history: Your repayment history plays an important role in your credit score. It tells whether you are paying your EMI, and credit card bills on time or not, whether you have missed or delayed payments, that will negatively affect your score. 
• Credit utilisation: It refers to how much you are utilising your credit. Suppose your limit is of 15,000 and you spent an outstanding amount of 20,000, this crosses your credit. So, using a large portion of your credit affects the score 
• Multiple credit applications: Every time when you apply for credit, the lender does a hard inquiry in your account, and if you apply on multiple applications at the same time, then this will affect your score. 

It’s important to remember that all of these factors work together, there is no single factor that will guarantee a particular CIBIL score.

How to Improve Your CIBIL Score

Making a few habits will help you improve your CIBIL score such as:

• When you pay all your dues on time without missing any deadline. 
• Keep your credit utilisation under control. 
• You should avoid applying for too much loan at once which will result in hard enquiry
• Start reviewing your credit report regularly to keep at track on records 
• Maintain your old accounts with responsibility 
• Try to manage your debt responsibly before you take on more. 
• Be consistent with building your credit history gradually.

Final Takeaway

Your CIBIL score is an important part of your credit profile, but that is not the only factor that is considered while assessing your loan application. Paying your dues on time, handling your credit responsibly all this will help you to build a healthy credit report. And making these financial habits will help you to maintain a good CIBIL score. If you are starting your financial journey in credit, building these financial habit will make a difference in the long run.

FAQ