September 3, 2024 · 11 mins read
Santosh Kumar
In the contemporary landscape, credit plays a vital role in our financial lives. CIBIL score is among the most vital factors that lenders take into account when assessing your creditworthiness. The CIBIL score helps indicate your creditworthiness, capacity, and ability to repay a loan.
Lenders use the CIBIL score to assess the risk of providing you credit. Credit card applications without income proof, for instance, can be possible if you have a CIBIL score of 750 or above. A high CIBIl score is an indicator of responsible credit behaviour and better creditworthiness, which improves the odds of loan or credit card approval to a good extent. However, before getting into what is the use of CIBIL score, it is vital to understand what CIBIL score actually is.
The CIBIL score is basically a 3-digit numeric summary of the credit history. It tends to be derived by making use of the details present in the 'Accounts' and 'Enquiries' sections of the CIBIL report. The details needed for calculation of the CIBIL score include, but are not limited to, your credit cards and loan accounts, their payment status, and outstanding amounts’ days past due. The CIBIL score would reflect your creditworthiness based on your borrowing and repayment history. The score ranges from 300 to 900. The higher your score, the better would be your chances of getting a loan. This is the key answer to the question, What is the use of CIBIL score?.
Also Read: How Students with No Income Can Get a Credit Card
Diverse credit bureaus have different algorithms for calculating the credit score. In India, we have four major credit bureaus: CIBIL, Experian, Equifax, and CRIF High Mark. All of these credit bureaus use their own scoring models. Hence, the answer to how a credit score is calculated is not that straightforward. This score may vary from one credit bureau to the other. However, there is a major common aspect when it comes to credit score calculation, which is the factors taken into consideration in the calculation of the CIBIL score. Understanding these factors would also help you to gain a better idea of “what is the use of CIBIL score”.
1. Payment history: Your payment history shall comprise your credit cards, personal loans, education loans, home loans and more. It provides information about late or missed payments, as well as how you have made your payments against the debts. Credit score algorithms generally consider the amount due, how recently and how frequently payments were missed, in order to calculate the credit score.
2. Credit Utilisation Ratio: This implies the total amount of credit you have used against the total available credit to you. If the utilisation ratio is more than 30%, your credit score will be impacted.
3. Total Number of Accounts: Your credit score can be impacted by the type of credit mix you have in your portfolio. A mix of credit products can help boost the credit score. Hence, if you only have taken out loans, it would be smart to apply for a credit card online as well.
4. Age of Credit: The older your credit card or loan, the better it is for your credit score calculation. Hence, you should avoid closing your old accounts even if you have paid off the debt. This also makes it a good idea for teens to get credit cards as soon as they turn 18. If you have a long credit history, it becomes easier for lenders to make an informed choice about whether to grant you credit.
1. Excellent CIBIL Score: 750-900.
2. Good CIBIL Score: 650-750
3. Average CIBIL Score: 550-650
4. Poor CIBIL Score: 300-500
1. Visit the CIBIL website
2. Click on the ‘Get Your CIBIL Score’
3. Enter the details necessary, like your full name, email address, and password. You shall also have to include an identification document
4. Provide DOB, PIN and phone number
5. Select ‘Accept and continue’
6. An OTP shall be sent to your mobile phone
7. Enter the OTP and then click ‘Continue’
8. Select ‘Dashboard’
9. Check your CIBIL score
Both lenders and borrowers can use the CIBIL score. Here are the various CIBIL score uses:
One's CIBIL score is a very necessary criterion in the loan application process.
CIBIl score helps borrowers gain a good understanding of their creditworthiness. Any person who can manage their finances in an efficient manner shall have a high CIBIL score.
A low CIBIL score indicates that a person has low creditworthiness. Most lenders are likely to avoid giving loans to such applicants. So, if your credit score is lower and you need a loan, you must think about how to improve it faster.
CIBIL score may impact a person's ability to obtain mortgages, insurance coverage, and even rent agreements. Many landlords and insurers decide to check the credit scores of prospective tenants and applicants to assess their financial reliability.
Also Read: Is 720 a Good CIBIL Score?
Credit can go a long way in enabling you to meet your financial goals or enable you to deal with a cash crunch in an emergency. Credit cards for housewives additionally can help them meet various day-to-day expenses of the household and contribute to the monthly budget. Basically, access to credit facilities is important for all. This is particularly true for the Millenials and GenZ generations today, who are much more open to embracing credit cards and loans than their parents used to be. Today, there are many available credit cards for 19-year-olds that allow teens to manage their money and build a credit history from a very young age.
While credit has become an important aspect of the lives of people, banks, non-banking financial companies and other lenders tend to be cautious about approving varied types of loans and approving credit card applications. This caution is maintained as these lenders provide people with funds with the expectation that the applicant shall fulfil their end of the loan agreement and repay on time. Hence, in line with these expectations, they are inclined to onboard customers with a proven track record of making timely payments, as reflected in a good CIBIL score and established in their credit profile. Hence, your CIBIL Score and Report are among the prime factors influencing the credit underwriting and approval process.
When thinking about what is the use of the CIBIL score, you need to consider the possible ways to maintain a high score, including:
1. Loan approval: Lenders typically prefer borrowers who have high credit scores. After all, high credit scores tend to indicate that you are likely to make your credit payments on time and have a low risk of default. Therefore, having a high CIBIL score improves your odds of getting approved for credit cards, loans and other forms of credit.
2. Bargaining power: If your credit score is high, you will have better negotiating power when it comes to loan terms, including repayment periods and interest rates. As you negotiate with lenders, however, you must be cautious about applying for new credit too frequently or to several lenders within a short period of time. Doing so can be mistaken for a sudden increase in credit appetite and might not be positively viewed by lenders.
3. Higher credit limits: A high credit score is an indication of responsible credit behaviour. This may lead to lenders providing you with extended credit limits on your credit cards and loans. This may provide you with improved purchasing power and financial flexibility.
4. Lower interest rates: Having high credit scores can allow you to avail a variety of loans at competitive rates of interest or reduced processing charges. Borrowers who have high credit scores tend to be seen as less risky by lenders. As a result, they can typically qualify for credits at lower rates. This would allow you to enjoy significant savings on interest payments over the long run. Smart modern consumers know that even a minor reduction in the rates of interest across expensive loans, like home loans or car loans, may lead to considerable savings. Hence, they try their best to build and maintain a high CIBIL score and use it to their advantage.
5. Faster approval process: Lenders generally streamline the loan and credit card approval process for borrowers who have high credit scores as they pose a lower risk. This basically implies that you may get approved for credit faster, which shall be a huge benefit in situations where you require prompt access to funds. If you are planning to apply for a loan in the near future and have low credit scores, then it is better to think about how to increase your credit score quickly to ensure that your loan gets approved at the time you need the funding.
6. Better financial opportunities: Having a high CIBIL score can open up opportunities for various financial products and services for individuals with lower scores. Some might be able to qualify for premium credit cards that provide exclusive rewards programs and benefits if they have high credit scores. People may even apply for credit cards without proof of income and still have their application approved without any hassle as long as they have high CIBIL scores.
7. Insurance premiums: There are many instances where insurance companies tend to consider the credit score of the applicant when trying to determine the premiums for certain types of insurance, like car insurance. Having a high CIBIL score, therefore, may lead to lower premiums and save you money over time.
People thinking about how to improve CIBIL scores should first try to lower their pending debt. High debt levels on credit card limits may lower credit scores. You have to keep your credit utilization up to 30%. You should not close your old account to avoid any impact because of the history. In turn, they may positively impact your credit health and overall CIBIL score. You need to be patient and committed to improving the CIBIL score, as the result may take some time.
If you believe that your CIBIL score is lower than your expectations, then it is better to check the credit report on a regular basis and keep an eye out for any kind of errors that can lower your CIBIL score.
Also Read: Is 650 a Good CIBIL Score?
Overall, a CIBIL score is crucial as it impacts your chances of obtaining loans or credit cards in the future. It has the power to impact your overall lending chances positively as well as negatively by demonstrating your financial responsibility. Consistent effort to maintain a good CIBIL score and responsible financial habits are necessary to have a good CIBIL score.
Why is the CIBIL score so important before taking any loan?
Ans. The CIBIL score reflects your creditworthiness. Based on the CIBIL score, the lender institution approved your loans.
What is a good CIBIL score to maintain?
Ans. If you have a 750+ CIBIL score, then it will be considered a good number. A good CIBIL score can range between 700-900.
Can my bad CIBIL score affect my loan approval process?
Ans. Yes, if you do not maintain a good CIBIL score, your loan request is more prone to be rejected. A good CIBIL score will also give you several benefits.
Will my regular CIBIL score check affect it?
Ans. No, checking your CIBIL score online is generally considered a soft query. It does not affect your score.
Can I raise a concern over errors in my CIBIL score?
Ans. Yes, you can raise concerns in case there is any kind of error in your CIBIL score. For this purpose, you must provide supporting documents.
Can I have multiple CIBIL scores?
Ans. No, each individual can have only one CIBIL score. Even if you have multiple credit cards, your CIBIL score will still be only one.
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