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How is CIBIL score calculated?

credit score

Owning a house in Mumbai is a dream come true for many. Seema is on her way to realize her dream – she is planning to buy a house. She has decided to avail of a home loan to help her make her dream into a reality. So she decided to browse the internet to check the essential documents she would need to furnish for processing her loan application. One of the things that caught her attention was a credit score.

She discovered that the chances of her loan application being successful depended on her TransUnion CIBIL Score, popularly called CIBIL Score. She wanted to find out how is CIBIL score calculated. She asked her friend Rohan who is a banker to talk her through the steps. Let us see what Rohan had to tell Sheetal about CIBIL score calculation:

Sheetal: Hi Rohan. Can you tell me what is a CIBIL score?

Rohan: It’s a three digit number which is generated by TransUnion Credit Information Bureau (India) Limited is known as CIBIL Score. CIBIL’s mandate is to collect and maintain monthly credit information reports (CIR) from various banks and financial institutions. The CIR includes information about the payment track record of a borrower. This includes previous and ongoing EMI payments and credit card payments.

The CIBIL score is an indicator of the credit history of the borrower. The CIBIL Score helps banks and financial institutions to assess if there is a possibility of any default by the borrower. So, it is crucial for processing your loan application.

Sheetal: Ok, so please tell me how is the CIBIL Score actually calculated?

Rohan: CIBIL uses an algorithm to generate the CIBIL Score. A couple of factors affect the calculation. These factors are:

• How has the individual utilized the credit?
• Whether the individual has defaulted on payments of any existing debts? For this component, EMI payments and credit card payments are considered.
• Certain trade attributes of the individual – what type of credit is a consumer using, does the consumer have a good balance of credit and how old are the lines of credit

As I told you, CIBIL Score is an assessment of the credit history and financial discipline of an individual who is looking to take more debt. Naturally, the previous records of debt service obligations are crucial.

Sheetal : So what is a high CIBIL Score for the banks to consider my loan application favourably? How can I make sure that my CIBIL Score is high?

Rohan: The value of CIBIL Score ranges from 300 to 900. A CIBIL score of 750 or above is a good score. It would definitely increase the chances of the loan being approved. With a high score, you can also insist on some fringe benefits – waiver of the processing fee, lower interest rates, lower EMI amounts etc. Some banks even provide an easy and quick disbursal of the loan when your CIBIL Score is high. But if you have a low CIBIL score, the bank might reject your loan application itself.

As I told you earlier your previous repayment history is very crucial for determining the CIBIL Score. You must ensure that all the repayments are made on time. Don’t leave any loan unsettled even if there are delays or default. There are also a few other tips that you can follow to ensure a high CIBIL Score:

• Be smart about utilizing the credit. At all times, the credit card over dues should be up to 50% of the limit.
• Don’t burden yourself with unnecessary loans. Avoid taking on multiple loans in a short span of time. Your financial portfolio should have a combination of secured and unsecured loans.
• Remember that this is an algorithm calculating your score. So it can make mistakes. It is possible that you have been paying all your credit card dues on time but an administrative error reflects it otherwise. This can have an effect on your overall score. Similarly, you might have an existing loan that you have fully paid off but the system does not reflect the latest status. This can also mean a low score. So obtain a copy of CIR from CIBIL and check your score. CIBIL provides free CIR along with the CIBIL score once in a year. For an estimated CIBIL score, you can consider any of the online finance market places.
• If there are any suspicious activities associated with your account, bring it to the notice of your bank immediately. It is possible that your account reflects a fraudulent loan in your name. Situations like these will also impact your CIBIL Score negatively.

Sheetal: Thanks, Rohan. This is very helpful. Now I feel confident applying for the home loan!