A creditor who is willing to offer you loans needs to evaluate your repayment ability. CIBIL score is one of the factors which lenders take into the picture while offering you a loan. CIBIL Score is a 3-digit number that evaluates the ability to repay the borrowed amount. The range of CIBIL Score is between 300 and 900, and the ideal score is above 750. Higher scores suggest that a borrower is a responsible borrower.

CIBIL score constitutes basically of 4 main factors i.e. Payment History which constitutes 30% of the total, Credit Exposure which constitutes 25% of the total cibil score, Credit Type and Duration is 25% of cibil score and other factors make up the rest 20% of total cibil score. We should be aware of them all to understand properly about the cibil score.

  1. Payment History – As the name suggests, payment history is a record of all the past and present payments made to your lenders. A strong payment history is needed to maintain your cibil score. Paying on time without fail is consistently needed to maintain your score.
  2. Credit Exposure – In simple terms, it is the total of credit given to the individual/company/borrower and it is used as a basis for measurement of maximum potential loss to the lender if the borrower defaults on payment.
  3. Credit Type and Duration – A balanced mix of secured and unsecured loanshave a positive effect on your score. The longer the history grows the better the impact it has on credit score
  4. Other factors – Your previous credit behaviour, loan repayment history, the nature of existing loans, and credit cards used in the past are some of the other factors used which affect the cibil score.

Importance of CIBIL Score

  1. Creditworthiness – It is assessing the borrower based on his previous transactions. A high CIBIL score is required to get better long-term loans. Borrower’s ability to repay the loan is assessed through his/her creditworthiness
  2. Lower Interest Rates –The interest rate is one of the factors which either encourages or discourages the borrower to take the loan. A higher CIBIL Score enables one to take a loan at lower interest rates and also with less paperwork.
  3. Prompt Application Approval – Creditworthiness of an individual takes place before sanctioning of the loan. Assessing Creditworthiness generally takes time, people with low cibil scores will be assessed more closely and applicants with high cibil scores will get the approval forloans more speedily.
  4. Increased Loan Limits – Financial institutions are not willing to give higher amounts of loans to riskier applicants, people with high cibil scores are perceived as less risky and they are in benefit to receive higher amounts of loans.
  5. Improved Negotiation – A person who has a higher credit score can negotiate with financial institutions/ lenders in terms of cheaper interest rates and longer loan tenures.

Ways to improve your CIBIL Score 

We should make payments on time to improve our cibil score. Using credit access only when required and not making this a habit increases the cibil score. A healthy mix of credit and reviewing the credit history from time to time are very much necessary to improve the cibil score. We should be careful to select the joint holder of our account because the joint holder of an account is equally held liable if the other joint holder doesn’t make the payment on time. Negligence in keeping a check on joint holders may affect your cibil score.

Leave a Comment

Your email address will not be published. Required fields are marked *