December 4, 2024 · 11 mins read
Santosh Kumar
The words credit score and CIBIL score have been very common terms you come across when handling your finances or applying for a loan or credit card. Although they seem synonymous, they have different meanings and implications. It is, therefore, crucial to understand the difference between credit and CIBIL scores to handle financial opportunities correctly.
This article carefully delves into the difference between Credit Scores and CIBIL Scores and their relevance in the financial world.
A credit score is a number that represents your creditworthiness. It reflects your financial behaviour, especially your loan and debt repayment history. Credit scores range between 300 and 900, and a higher score represents better credit health.
The banks have significantly based the decision on how risky a borrower you are or a credit worthy one on the credit score. Here's the usual purpose of credit scores:
1. Loan Approvals: The lenders judge Whether to accept loans based on credit scores.
2. Interest Rate: Creditworthy individuals will receive the least interest rates offered to a borrower.
3. Availability of High Credit Cards: Premium credit cards are available only to people with very good credit scores.
A CIBIL score is one of the credit scores designed by TransUnion CIBIL, India's first and leading credit information company. Just like a credit score, it ranges between 300 and 900. The CIBIL score forms part of a CIBIL Credit Report, which represents an all-inclusive report on your credit history.
CIBIL scores are well-known in India and are usually the lender's first preference when evaluating a borrower's creditworthiness.
Components of a CIBIL Report:
1. Credit Summary: Total credit limits, outstanding balances, and active loans.
2. Repayment Track Record: Payments on time and defaults over the years.
3. Credit Inquiries: Institutions accessing your credit report.
A credit score is a general term for the numerical summary of how creditworthy one is, computed by the credit bureaus from one's credit history. This is a global concept, widely used in most countries. In contrast, the CIBIL score is one kind of credit score computed only by TransUnion CIBIL, India's leading credit information company.
While every credit score is a CIBIL score, not every credit score is CIBIL. A TransUnion CIBIL credit report sees its counterpart, the credit score; on the other hand, other credit reporting agencies, such as Equifax, CRIF High Mark, or even Experian, have a completely different type of score in that department.
Credit score refers to multiple credit scores produced by more bureaus. These are:
1. TransUnion CIBIL: Provides the CIBIL score. Most accepted in India
2. Experian: Global credit agency which offers scores based upon international credit reporting standards
3. Equifax: International credit bureau and its scores are taken both in India and international borders
4. CRIF High Mark: Indian credit bureau working based upon regional credit reporting.
This, for example, means that scoring methodology and proprietary algorithms can vary between bureaus, so your credit score may differ very marginally between them.
The CIBIL score is only available from TransUnion CIBIL, giving the score a unique position within the Indian financial system.
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The scope and geographical relevance of credit score as against the CIBIL score varies to a great extent:
1. Credit Score: This term has universal applicability. For example, an individual seeking credit in the United States may use scores from bureaus like Experian or Equifax. Similarly, in Canada and the UK, there are their own respective bureaus that generate credit scores.
2. CIBIL Score: This is specific to India. It is the most widely accepted credit score by Indian banks and financial institutions. However, it holds little to no relevance outside India.
Example: If you’re applying for a loan in the U.S., the lender will likely refer to your credit score from Experian or Equifax. However, for an Indian bank, your CIBIL score is often the primary metric.
The difference between credit scores and CIBIL scores also lies in how they are calculated. While both follow similar broad principles, each bureau applies its unique algorithms. Let's examine this further:
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1. A credit score from any bureau is calculated based on the following:
2. Payment History (35%): Your consistency in repaying debts like EMIs and credit card bills.
3. Credit Utilisation (30%): The percentage of your credit limit that you've used.
4. Length of Credit History (15%): Longer accounts have a positive effect as they reflect stability.
5. Credit Mix (10%): A balanced portfolio of secured and unsecured credit positively affects your score.
6. New Credit Inquiries (10%): Applying for credit too often can negatively affect your score.
The CIBIL score is calculated using a proprietary formula that reflects the lending patterns in India. It mainly considers:
1. Repayment Behavior: All repayments on time increase the score, but all arrears or defaults reduce it.
2. Credit Enquiries: A large number of credit inquiries for loans or credit cards in a short time is also detrimental to the score.
3. Credit Utilisation: Ideal utilisation would be under 30% in all the credit lines that report.
4. Credit Mix: CIBIL likes a mix of both secured and unsecured credit. Credibility builds
5. Credit History: A longer history establishes more reliability for the lenders.
Although the weights assigned to these factors are roughly equal, small variations in algorithms result in differences in scores across bureaus.
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A credit score is usually given along with a credit report that provides detailed information about your credit behavior. The bureau that prepares these reports varies.
A CIBIL report consists of your CIBIL score and an in-depth profile of your credit behaviour, tailor-made to the Indian financial systems. This report includes information on all active loans, credit card limits, repayment histories, and recent inquiries. It is usually considered the gold standard for assessing a borrower's creditworthiness in India.
This leaves key differences between Credit Score and CIBIL Score in terms of form and content among bureaus; the CIBIL is an exclusively Indian credit score by banks of standards that holds an incomparably greater position in India.
A vital difference between a credit score and a CIBIL score would be lender preferences:
1. Credit Score: Lenders prefer any available Experian or Equifax in the U.S. or any TransUnion or Equifax in Canada.
2. CIBIL Score: In India, the vast majority of banks and NBFCs (Non-Banking Financial Companies) consider the CIBIL score. While lenders may accept scores from other bureaus, their primary check is usually the CIBIL score.
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The trend shows the regional hegemony of the CIBIL score in India's financial arena.
This also shows the difference between a credit score and a CIBIL score: the way in which errors in your credit reports can affect your creditworthiness.
1. General Credit Scores: Errors in reports from bureaus like Experian or Equifax can be contacted and resolved with the bureau in question. However, this would vary between regions.
2. CIBIL Score: Errors in CIBIL reports can be raised directly by accessing the TransUnion CIBIL website. Due to its leadership in the Indian market, rectifying erroneous scores in your CIBIL is crucial to seeking credits.
Example: Suppose you see a default recorded in your CIBIL report, but you have paid all your dues in time. You must dispute this error in time to maintain your CIBIL score, especially if you are planning to apply for a loan.
The importance of the difference between credit score and CIBIL score should be understood for good financial planning.
1. International Planning: If you want to take credits abroad, you should improve your scores from bureaus such as Experian or Equifax.
2. Domestic Planning: For Indian customers, the CIBIL score is crucial because that is what matters the most in the eyes of Indian financiers.
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Availing a credit score may come with a charge from the bureau:
1. General Credit Scores: Some bureaus allow free credit score checks on a periodic basis, while others may demand a charge for detailed reports.
2. CIBIL Score: You have one free CIBIL score check per annum with TransUnion CIBIL. You would have to subscribe for more checks or detailed reports.
Which credit bureau you choose can affect what credit products you qualify for:
1. Credit Scores: Different lenders prefer scores from specific bureaus in international markets. For instance, an American lender may like Experian more than Equifax.
2. CIBIL Score: In India, almost all banks and NBFCs use the CIBIL score as the main parameter for scrutinising loan and credit card applications.
Understanding the difference between credit score and CIBIL score helps in:
1. Lender-Specific Strategies: Different lenders may prioritise different credit bureaus. Knowing this can guide your credit-building efforts.
2. Error Resolution: This allows for the correction of specific errors in reports such as a CIBIL report.
3. Global Financial Planning: If you plan to seek credit overseas, you should concentrate on bureaus like Experian or Equifax.
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This confusion arises because CIBIL was long the only credit bureau in India, and hence, its score was the most widely used credit metric for years. Once other credit bureaus like Experian and Equifax entered the Indian market, the term "credit score" became more common, but "CIBIL score" remained synonymous with creditworthiness in many minds.
Although today, lenders in India may accept scores from other credit bureaus, a CIBIL score still prevails owing to its long-standing reputation in the market.
Building and sustaining a healthy credit score are skills. Here are a few tips that can work:
1. Pay EMIs and Credit Cards: Clear the EMIs and credit card payments before the due dates.
2. Minimum Credit Utilisation: Tackle no more than 30% of credit card utilisation.
3. Do Not Apply Often: Limit frequent applications of fresh credits.
4. Incorrect Information on the Report: Carry out an investigation and rectify the wrongs.
5. Maintain a Credit Mix: Use a combination of secured and unsecured loans to showcase creditworthiness.
6. Avoid Settlements: Try to pay off debts entirely instead of opting for settlements, as this reflects poorly on your report.
Read More:: Benefits of Good Cibil Score
Though credit score and CIBIL score are closely related terms, they are not the same. The CIBIL score is a specific kind of credit score generated by TransUnion CIBIL, especially relevant in India. On the other hand, a credit score is a more general term that refers to scores generated by several credit bureaus.
Knowing the difference between a credit score and a CIBIL score empowers an individual to make more informed choices about his financial life. Whether you are securing a loan or negotiating better terms, this is important in ensuring that your overall financial health has improved. All these focus on timely payments, responsible use of credit, and regular review of your profile to enhance financial stability and access.
1. Is the CIBIL score the only credit score used in India?
No, India has multiple credit bureaus, including Experian, Equifax, and CRIF High Mark, that provide credit scores. However, the CIBIL score is the most widely accepted by Indian lenders.
2. Is there a difference between Credit Score and CIBIL Score?
Yes, they can because credit bureaus have different algorithms and data. Even though parameters such as payment history or credit utilisation are similar across bureaus, the scores may be a little different among them.
3. Credit score or CIBIL score? Which one shall I concentrate on?
If you are from India, you should emphasise your CIBIL score as it's most in use. However, with good scores in all bureaus, your access to financial products will get better.
4. How frequently should I check my credit score or CIBIL score?
Use the services for at least six months to review whether your financial health is unaffected by errors in reporting your information. You have an annual right to free one report from each of these bureaus.
5. My credit score and CIBIL scores are low. How can I increase those?
Pay bills on time, minimise credit usage, avoid a lot of applications for credits, maintain a healthy mix of credits, and dispute errors in the credit report.
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