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CIBIL Score and Why it Matters

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So you need a loan because you’re starting a family, buying a new house, and wish to take travel internationally for your honeymoon. Your current financials look good, and your business’ potential leaves no question of getting squashed under the burden of repayment. A personal loan could be an excellent option for you.

But did you know a personal loan approval will require you to present a good CIBIL score? What is the CIBIL score, you ask? CIBIL score or credit score can prove your creditworthiness to the financial institution and make or break your case for getting a loan. Read this article to understand more about the CIBIL score and its importance in finance.

What is the CIBIL score?

CIBIL score, also known as Credit score, displays the ability of a person to pay back a loan. It is a three-digit number ranging from 300 to 900 issued by the Credit Information Bureau of India Limited (CIBIL). Your CIBIL score is calculated from your historical financial data. If you have a high CIBIL score, it shows you are responsible when paying back loans. For the same reason, a good CIBIL score can improve your chances of getting loan approval.

Factors affecting the CIBIL score

Your CIBIL score combines five significant factors determining your characteristic of paying pack on time. It’s 30% based on your historical payment data, 25% on the type and duration of credit used in the past, 25% on credit exposure, and 20% on other data. Here’s a list of a few things that can influence your credit score issued by CIBIL:

1. Duration of Credit History

Credit history starts getting recorded from the moment you acquire your first credit account. A more comprehensive credit report means more details for a financial institution to examine. In an ideal situation, lenders want to see a long history of positive transactions between you and credit-giving institutions. It is better to initiate this record sooner in life to build a strong credit history. Keeping old credit cards that you don’t use anymore can help build a long record of credit history.

2. Credit utilisation 

The credit utilisation ratio measures how much credit you have utilised in relation to your available credit limit. According to experts, using more than 50% of the available credit limit shows that you often spend beyond your means and negatively impacts your score. Ideally, credit users should spend below 30% of their credit limit. 

3. Credit Mix

Having different types of credit accounts lets CIBIL know that you can manage both types of loans – secured and unsecured. Personal loans are a type of secure loan, while credit cards are a form of unsecured loan. Not having a diverse credit mix won’t drop your score, but having one can improve it. 

4. History of repayment

The primary purpose of a bank seeking to know your CIBIL score when you want a personal loan is to determine if you will pay back on time. Therefore, your history of paying back debts on time significantly affects your CIBIL score. 

Credit users often delay monthly payments for a long time by paying minimum dues. This affects the repayment history negatively and, in turn, your CIBIL score. Therefore, pay back all credits on time if you want a good CIBIL score. Set reminders for payment if you have multiple credit cards or loans never to miss a date. 

5. Number of credit applications

If you make several credit applications, it will affect your score. Lending institutions will request credit scores through a hard inquiry whenever you apply for a loan or credit card. Every hard inquiry harms your credit score because it shows that you desperately need funds. So, if your bank sees that you’re seeking loans from several places, they’ll assume that your financial health is in shambles and you will not be able to repay. 

Why is it important?

The CIBIL score reflects your financial health. It allows lending institutions to understand better the risks associated with granting a loan to you. Credit scores are also important for people to understand their credit status. With a summarised CIBIL report, individuals can figure out discrepancies and make appends to maintain a good score. A good CIBIL score is important for two primary reasons: 

1. Get easy approval for loans

A good CIBIL score increases your eligibility for a loan. A score of 750 and higher is considered a good CIBIL score. It suggests to lenders that you have a good repayment history and that offering you a loan is not very risky. 

2. Get competitive rates of interest

Exceptional CIBIL scores not only make you easily eligible for loans, but lenders will also offer great interest rates. In addition to owing low interest on your loan, the lenders will also not demand much paperwork.  

Where is the CIBIL score used?

By now, you already know that lenders require the CIBIL score when approving a loan. They need it to determine your eligibility, credit limit, and interest rate. You may think only financial institutions require a CIBIL score when you need a loan. However, you may be surprised that even telecom operators could ask for it. More and more telecom partners ask for CIBIL scores to figure out how much limit on post-paid phones they can allow.

Conclusion

If you’re seeking a personal loan for a luxurious getaway with your partner, you must check your CIBIL score first. You are good to go if your credit score ranges between 750 and 900! Want to check your CIBIL score? It’s easy! Just go to the official CIBIL website. You can receive one free report from the CIBIL website every year.

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