October 2, 2024 · 11 mins read
How is your CIBIL score calculated? The Complete Breakdown
Santosh Kumar
How to calculate CIBIL score? Have you ever wondered why some folks find loan processing easy while others find it quite difficult? One of the major factors is the CIBIL, a three-digit number that tells banks how trustworthy you are when it comes to repaying debt. Check the complete breakdown to learn how to calculate CIBIL score and how to calculate cibil score for personal loan.
Have you ever wondered why the CIBIL score is a hot topic of discussion for everyone? No, it's not just a figure. Your CIBIL score is a big deal because it lets the banks know how likely one is to return the amount they borrow. Here's why it's so important:
If you have a high CIBIL score, then it only means you are great at returning money. This means banks are very likely to approve your loan or credit card application without giving you too many headaches. Now, with a good usually above, 750-you are in the safe zone for getting credit.
A good score grants loans at relatively cheaper rates. Banks consider you less of a risk, giving you better deals. It saves a lot from your purse, especially for huge loans like house or car purchases. Knowing how to calculate cibil score for car loans will help in the process.
Credit card companies may offer a higher limit based on a good CIBIL score. This will enable one to spend more without reaching the limit, which is helpful in emergencies or big purchases.
With a good CIBIL score, a loan and even a credit card can be approved quickly. This is because banks consider you trustworthy; hence, try to speed up the process and provide it as soon as possible.
A good score means you can negotiate when you talk terms with a lender. You may bargain for lower fees, better rates, or higher limits because you have a good history.
High scores make you target customers for premium credit cards, offering loads of cool perks like travel rewards, cash back, etc. Such cards mostly come with better benefits and higher limits.
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There are four aspects assist in the calculation of CIBIL score:
Your CIBIL score is an algorithm-based score that further breaks down into these four components:
1. Your Repayment History: It would contribute nearly 30-35% of the CIBIL Score calculations and will show your ability to repay money if you have taken any.
2. Credit Utilization: This contributes to 20-25 %of your CIBIL Score computation and shows what credit is being used compared to the total credit limit available to you.
3. Credit Mix and Length of Credit History: This considers the kind of credit you have availed of and how long you have maintained credit, and it contributes to 20-25% of the total CIBIL Score.
4. Number of Credit Applications: This includes the frequency with which one has applied for a new loan, and it also formulates about 20-25% of the factors of CIBIL Score.
Now, let us look at how each of these factors is measured.
Read More:: CIBIL Score Role in Loan Application Process
Repayment history is the record of how far you have gone in returning what was due. This is the most important contributor for how to calculate CIBIL score for personal loan. Assume one has borrowed ₹ 5,00,000 for a personal loan and has a credit card bill of ₹ 50,000. Good if one makes all payments in a month on time, but if one misses even a single payment, that is a red flag. A single missed payment can see one's score drop by a big margin. If you have been paying your dues on time, this can boost your score up to 100 points; if you have continuously been in arrears, it may drop by 50, 100 points, or more.
This factor considers what portion of your available credit you're using. Think of it as your credit diet- the less you consume, the better!
Let's say you have a total credit limit of ₹2,00,000, but you've spent only ₹ 50,000 of it. Your credit utilization is 25%, which is very good. But if you've used ₹1,50,000 of your ₹2,00,000 limit, then your utilization surges to 75%, and this percentage can hurt your score.
The golden rule is not to cross more than 30% of credit utilization. If you do so, the score would remain healthy. However, frequent use of more than 50% of the credit limit can pull down your score by 30 to 50 points.
It considers the types of credit you have and how long you have maintained them. Having a credit mix is like a balanced diet- a little bit of everything. When you have only one kind of loan, all credit cards or just a home loan, that doesn't show variability. But when it's both secured loans- a home loan- and unsecured loans- a credit card- that's a better picture. Also, the longer you have handled credit, the better. That means you have had some experience managing loans.
Having a good mix of credit and having dealt with them well over a long period, your score could go up by as much as 50 to 70 points. However, if you have only short-term loans or a limited credit history, your score may not see a much-needed improvement.
This includes how often you apply for loans or credit cards.
Each time you apply for a loan or a credit card, the bank checks your score. In other words, that is what is called "hard inquiry." Too many inquiries within a short period can make you appear desperate for credit, thus hurting your score. If you applied for a few loans or credit cards within a very short period, like a couple of months, you could face a reduction of 20 to 30 points or even more. However, a few inquiries over a longer period won't have much of an impact.
Understanding exactly how your CIBIL score is calculated. After all, it is a matter of knowing the different variables that constitute this three-digit all-important number. It is determined, above all, by one's repayment history, credit utilization ratio, credit mix and length of credit history, and the number of inquiries for credit. Every one of these variables will tell a lender a story of your creditworthiness.
Another interesting factor that CIBIL takes into consideration is averaging credit age. In other words, it calculates the average age of all your credit accounts to assess how long you have had credit. The longer the average age, the better it would be for your score. If you have many credit accounts opened at different times, CIBIL uses an algorithm to compute the average age, which is very important at the time of determining your score. For example, closing an older credit account reduces the average age of all your accounts, thereby probably bringing down your score.
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The factors that can affect creditworthiness, i.e., your credit score, are as follows:
The most crucial factor determining whether your CIBIL score's fate shall shine is your payment history. Your timely payments of credit card bills, EMIs, and other loans would positively impact your credit score. However, this may fall considerably if your repayments are delayed, faults occur, or the amount has been settled.
The percentage at which you avail yourself of your credit limit or the credit utilization ratio, also matters a lot. You are supposed to utilize less than 30% of the available credit. Higher utilization shows that you over-depend on credit, and this may negatively impact your credit score.
Your credit score is affected by the age of your credit accounts. The longer you've had credit, the more information there is about your repayments; this generally tends to improve your credit score. However, new credit accounts or short histories may not have enough information for an accurate, favourable assessment.
It is good for your score if you can maintain a mix of secured credit, home loans, and unsecured credit, personal loans or credit cards. A diversified credit portfolio denotes that you are capable of handling different types of credit responsibly.
Some lenders will place a hard inquiry on your report when you apply for credit. Too many inquiries in a short period can drop your score, as they may indicate that you're looking for too much credit.
The overall amount of unpaid debt is also a determinant of your score. High levels of unpaid debt, especially unsecured debt like credit cards, will hurt your score because there is greater risk associated with the credit.
Read More:: Is 720 a Good CIBIL Score?
Here are some steps that you can follow to increase your CIBIL Score:
1. Always Pay on Time: Set reminders to pay your EMI and credit card bill well in advance of the due date.
2. Less Credit Usage: Keep your expenditure under 30% of the total credit limit.
3. Diversification of Credit: Try to have different types of credit, such as a home loan and a credit card.
4. Limit Applications: Avoid making too many applications for loans or credits in a very short period.
5. Check Your Credit Report Regularly: There can be some mistakes. Monitor your report and start working on correcting those errors soon.
CIBIL Score Calculation is a systemic calculation that requires many important components to consider you a person of credit. The record of repayments, the largest constituent part of the credit score, reflects whether one has paid credit card bills and loan EMIs on time. Credit utilization is a measure of how much credit you use relative to your credit limit. This ratio should be kept under 30% for the best possible score.
Other factors that play an important role are a credit mix, showing a mix of both secured and unsecured loans, and the length of the history of credit. A good diversity in credit mix, well managed for a long period, adds to your score. Again, the number of inquiries shows how frequently you have applied for new credit; too many inquiries in a short span bring down your score because it tends to show higher credit-demanding behaviour.
All these were measured to give an overall picture of your financial behaviour, and finally, it is these factors together that decide the final CIBIL score. When well comprehended in position and calculation, they will be able to manage their financial habits properly, make informed credit decisions, and ensure a good CIBIL score in the future.
Read More:: What is the Use of CIBIL Score?
How to analyze whether my CIBIL Score is good?
As per standards, a CIBIL Score of 750 and above is really good. It only means that you are a low-risk borrower; hence, chances are that you will have lower interest rates and other privileges.
Will my CIBIL Score be refreshed monthly?
Your CIBIL credit score will refresh monthly because it is based on your credit actions. For example, if you repay a loan or make a repayment towards your credit card, the same will eventually reflect in your score.
Will I lower my CIBIL Score by checking it?
No, this is only a query and, therefore, has no bearing on the score. So, a person can check as many times as possible to find out what score they will have for their CIBIL Score.
Will closing a credit card affect my score?
Yes, it can. Closing a credit card may lower your overall available credit, thereby raising your credit utilization ratio and decreasing your score. It's often better to keep older cards open, even if you use them infrequently.
How long does it take to improve my CIBIL score?
Improvement doesn't just occur overnight. It generally takes six months to a year to develop good credit habits, including bill payments and credit management, to see your score significantly improve.
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