Most conversations about finances, banking, and money lending involve discussing the CIBIL score. Have you ever wondered what this score is and why it is so important in the world of finance? Everyone must be aware of its meaning and significance and regularly check their own score so that they can enjoy all the benefits of having a good CIBIL score.

First of all, you must not get confused between the CIBIL score and the credit score. These are just two different terms that refer to the same thing. In India, the credit score is calculated by four Credit Information Companies (CICs): TransUnion CIBIL, Equifax, Experian, and CRIF Highmark. Since TransUnion CIBIL is one of the oldest and most well-trusted credit bureaus, the credit score is commonly referred to as the CIBIL score.

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What is the Use of CIBIL Score?

In the briefest, the CIBIL score is a three digit indicator of the creditworthiness of an individual. What this means is that a person's CIBIL score tells prospective lenders about his handling of the credit provided to him in the past. This includes things like loans, credit cards, etc. By looking at the CIBIL score of a person, banks and other financial institutions can tell if the applicant is responsible and pays his dues on time or not. This way, they can judge the amount of risk involved in lending money to the person. Naturally, lenders prefer applicants whom they can trust to repay their money on time, and the CIBIL score helps them assess exactly that.

While this is why the CIBIL score is important for lenders, let us now explore all the reasons why the CIBIL score is important for individuals.

1. Get Loans Easily

Applying for a loan is no guarantee that the lender will grant it to you. They consider many different factors before they approve your application and sanction the loan to you. One of these factors, and a very important one, is that person's CIBIL score. Since the credit score indicates how responsibly you have handled credit in the past, it gives lenders an idea about what to expect from you in case they provide you with credit. With a high CIBIL score, you can win the trust of the lenders and get your loan applications approved quite easily. In short, it increases your worthiness for a loan.

2. Get Credit Cards Easily

Just like the CIBIL score helps you get approval for loans, it also helps you get credit cards; credit cards are desirable financial tools. They make spending convenient as well as rewarding since with features like reward points, discounts and exclusive offers, people tend to make a lot of savings. Credit cards are also basically money provided by banks to you that you need to pay back on time. Therefore, credit card providers also look at the CIBIL score of credit card applicants before issuing a credit card to them. With a good CIBIL score, you can enjoy having a good credit card.

3. Get Pre-approved Loans

Pre-approved loans are loans that are offered by banks and NBFCs to some selected customers. Getting a pre-approved loan means that you do not have to go through the hassle of submitting various documents and waiting for verification and approval. The application process is extremely quick and you get the sanctioned amount in no time. Banks offer pre-approved loans only to customers with brilliant credit scores and meet some other eligibility criteria.

Read More:: Benefits of Good Cibil Score

4. Increase Your Power of Negotiation

The uses and benefits of CIBIL score are not only limited to ensuring eligibility for loans and credit cards. A good and high CIBIL score is also used to give a person increased negotiation power when they obtain a loan or get a credit card issued.

Loans: Having increased negotiation power in the context of loans means that you can ask your lender to sanction a higher amount of loan, give you a longer tenure to repay the loan, and provide you with the loan at lower than usual rates of interest. All these benefits can be enjoyed if the person has a very good CIBIL score (above 700) and can thus show their credibility as an applicant and win the trust of the lenders.

These benefits make the loan easier to pay. A higher loan amount obviously gives the borrower an increased spending capacity. A longer tenure means that the person will have smaller monthly instalments to pay, making the loan less burdensome. Similarly, the lower the interest rates, the more comfortable and easy it is for an individual to repay the dues on time. Credit Cards: The increased negotiation power while getting a credit card entails that the individual can get a higher limit on the card, thus increasing his spending power. This means that they can make purchases more freely. A good CIBIL score also makes one eligible for some exclusive credit card offers, special discounts while shopping, dining, travelling, etc. and exciting reward points. All of this finally helps them make increased savings.

5. Lower Insurance Rates

Apart from loans and credit cards, a good CIBIL score also brings in benefits related to insurance. People who have high credit scores can get cheaper insurance premiums than others. This is because insurance firms see such people as low-risk policyholders who are less likely to miss out on or delay payments. So a good CIBIL score will help you get excess to comparatively lower insurance rates.

Read More:: Reasons For Loan Rejection Despite Good CIBIL Score

How Is CIBIL Score Calculated?

Now that you know the multiple uses of the CIBIL score, you must also know what factors determine your final credit score so that you can keep track of and maintain a good CIBIL score. The CIBIL score of an individual will always be between 300 and 900. The higher your score, the better it is for your financial well-being.

The CIBIL score is calculated based on a large amount of data collected by the credit bureaus about a particular individual's credit history and usage. Credit information companies get this data from various sources, including banks, credit card providers, collection agencies, and governments.

The data that is collected and used by the four Indian credit bureaus to calculate people's credit scores includes the following information:

1. Repayment History: One of the biggest factors impacting an individual's CIBIL score is their repayment history. This includes how well and on time they have repaid their loan amounts, including the interest rates, credit card bills, and even their EMIs. This is used to judge how financially responsible a person is.

2. Credit Utilisation Ratio: A person's credit utilisation ratio greatly impacts their CIBIL score. This ratio signifies how much of the total available credit a person ends up using. The credit utilisation ratio should be low in order to have a good CIBIL score. A higher ratio shows that the person is credit-hungry or highly dependent upon credit for all their financial needs.

3. Credit Mix: The credit you receive can be categorised as secured or unsecured. Secured loans are taken by keeping something as collateral with the lender that makes them feel safe, whereas unsecured loans are taken without any collateral, acting as a safety net for the lender. How balanced your credit mix is matters when your CIBIL score is being calculated. Secured loans must outnumber unsecured ones in order to get a good CIBIL score.

4. Number of Hard Enquiries: When you enquire about a loan, it is marked as a hard enquiry on your credit report. The number of credit enquiries (e.g., loan and credit card applications) you make in a given period of time greatly affects your credit score. It is better to have minimum credit enquiries in order to obtain a good credit score.

5. Length of Credit History: A longer credit history means that prospective lenders will see you as reliable and financially stable. A shorter history signifies a higher risk for them. Therefore, the longer your credit history is, the better it is for your CIBIL score.

Read More:: What is CMR Rating in CIBIL?

Conclusion

The CIBIL score of a person is a huge determinant of what kind of financial services they will be able to enjoy. Ranging between 300 and 900, a higher CIBIL score helps people easily get approval for loan and credit card applications. After approval, the CIBIL score also plays a role in deciding what kind of loan terms and credit card benefits they will be able to enjoy. For instance, a higher CIBIL score will help people get a higher loan amount, longer loan tenure and lower interest rates. They will also be able to negotiate for a higher credit card limit and gain access to some amazing offers, reward points and discounts. The CIBIL score is also used while getting insurance premiums. People with good CIBIL scores have to pay lower interest rates than those with poor credit scores.

Since the CIBIL score influences so many things in terms of your financial experience, you must take all possible measures to maintain a high score. Focus on things like paying your dues on time, maintaining a healthy mix of secured and unsecured credit, making credit enquiries only when required and keeping your credit utilisation ratio low.

Frequently Asked Questions (FAQs)

1. Can I change my CIBIL score and make it higher?

Yes. CIBIL scores are not permanent numbers and can be changed by adopting good credit habits such as repaying loan instalments and credit card bills on time, not making too many loan enquiries, keeping your credit utilisation ratio low and having more secured than unsecured credit. However, remember that your CIBIL score will not change in a day. It will go higher over a period of time.

2. Can I get a personal loan if my CIBIL score is 700?

Yes, 700 is generally considered a good enough CIBIL score for getting a loan. If you meet all other lender eligibility criteria, you should find it easy to get your loan application approved.

3. How can I have a CIBIL score?

When you take loans, credit cards, etc., the credit bureaus in India record all this information. Based on your use of this credit, they build your credit report and generate your CIBIL score over time. If you are a student or just newly employed, you might not have any credit history at all, and therefore, you would not have a CIBIL score. Once you start taking credit, you will eventually get a CIBIL score as well.

4. How to check my credit score?

There are many ways of checking your CIBIL score. You can do so on the official website or mobile app of any of the credit information companies of India. Visit the website or app of your bank or even check it on the online platforms of FInTech companies such as Cred, Paytm, Paisabazaar and Bankbazaar.

5. What is the difference between a credit report and a credit score?

A credit report is a detailed document that contains all information about your credit history over the past 7 years. This will include things like how many times you enquired about a loan, how many ongoing loans you have, how many loans you have paid off, if there are any loan settlements, details about your credit card usage, etc. A credit score is a three-digit number between 300 and 900 that is a part of the credit report and can be seen in its top right corner. It is like a summation of the credit report and tells lenders how creditworthy an applicant is.