You must have heard people in business and corporations talk about their CIBIL scores. Have you ever wondered what a CIBIL score is and how is it calculated? Almost no loan or credit card application is approved without first reviewing the applicant’s CIBIL report and CIBIL Score.
Therefore, for the sake of a responsible financial planning, a credit score check is essential. Let us learn how to do that briefly. But before we do that, let’s discuss its importance in brief:
Importance of Checking Credit Score
To enhance our lifestyle and plan financially for our future, we desire numerous assets and investments such as insurance plans, luxurious commodities, fixed capital, and properties to earn better and get ROIs eventually. But our current purchasing power often falls short of meeting our desired expenditure. For the same reason, we all resort to using credit income to assist us in attaining things that we might not be able to afford at the current stage.
For instance, on a small scale, corporate employees who get monthly salaries cannot afford expensive commodities without saving for a couple of months. They then use credit income to get the desired wants and are still able to compensate for it with the next month’s salary. On the other hand, on a large scale, individuals opt for short-term and long-term loans for education, settlement, and business practices. In addition, financial organizations provide credit services to help us get economic aid for our expenditures.
But since it is a monetary transaction, companies never blindly trust any individual before providing credit services. Lenders use credit scores to evaluate customers so that when they provide the appropriate amount of credit, it can be retrieved back in time. A credit score reflects our willingness to manage and pay the credit back.
In India, the agency accredited by The Reserve Bank of India is the Credit Information Bureau (India) Limited, which calculates your credit scores. It is known as the CIBIL score. The CIBIL Score is a numerical three-digit representation of your credit history. The credit history from the CIBIL Report calculates your score. A Credit Information Report records a person’s credit payment history across various loan types and credit institutions over time (CIR).
How is the Credit Score Measured?
A range of factors affect the computation of our credit score:
- Payment History: 35%
Every time we obtain a loan or credit, the lender must report it to CIBIL. The bank keeps track of whether we pay our bills on time, and if we try to repay in advance, it is a positive indicator. Therefore, our repayment record has the most contribution when deciding our creditworthiness.
- Credit Utilisation: 30%
The credit usage ratio is the percentage of credit used concerning your total credit limit. Experts recommend keeping your credit utilization below 30% to maintain a healthy credit score. Banks and Lenders evaluate if we have a growing debt depending on our over-utilization of credit to measure the risk of trusting credit.
- Credit History Duration: 15%
It refers to the span during which you have managed credit. Lenders assess how long you have been maintaining your credit transactions and for what period your credit score was above average. The less credit experience the banks feel we have, the smaller amount of loans they provide.
- New Credit: 10%
New credit is the number of current inquiries we have applied to demand credit. Like credit utilization, lenders analyse the risk by looking at our history of credit requirements to understand how frequently we have availed credit. Multiple hard inquiries show that you are desperate for credit, making you a high-risk borrower.
- Credit Mix: 10%
It records the different areas in which you have demanded credit. It includes loans of all types, credit cards, etc. Then it indicates the bank of your credit maintenance. It also helps people understand their financial situation and willingness to repay debts. It is one of the most popular criteria financial institutions use to understand how reliable and responsible customers are with their credit.
We can check our credit score online on several websites backed by authorized financial institutions using minimal credentials such as gender, name, date of birth, mobile number, PAN, pin code, and email address. With a good credit score of around 550 to 900, customers are considered trustable by credit lenders. The amount of credit we can get is directly proportional to our credit score.
With a good CIBIL score, we can invest in anything using credit to secure our future, such as gold, property, and stocks. The gold price in India varies according to certain market forces, and we can also track the trend of the prices online. Since gold investments are incremental with inflation, it has always been India’s most investing commodity.