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What is a CIBIL Score?

CIBIL Score is a three-digit numeric summary of your credit history. The score is derived using the credit history found in the CIBIL Report (also known as CIR i.e Credit Information Report). 

A Credit Score plays a critical role in the loan and credit card approval process. This is the first screening criterion applied by banks and financial institutions when reviewing your loan application.

A CIR is an individual's credit payment history across loan types and credit institutions over a period of time.

A CIR does not contain details of your savings, investments or fixed deposits.

CIBIL score, calculated based on your credit behavior as reflected in the 'Accounts' and 'Enquiries' section of your CIR, ranges between 300-900.

A score above 700 is generally considered good

Details in Account information of CIBIL?

This section contains the details of your credit facilities including name of lenders, type of credit facilities (home, auto, personal, overdraft, etc.), account numbers, ownership details, date opened, date of last payment, loan amount, current balance and a month on month record (of up to 3 years) of your payments

Why is credit rating important?

There are several situations where your credit score plays a crucial role:

1. When applying for a loan - If you have a low score, Banks might be unwilling to lend to you as they are unsure about your ability to make full and timely repayments. If you have a good score, lenders will view you as a safe, low-risk customer and automatically approve of your loan application. In addition, you might be offered better terms (lower interest rates) or a longer repayment period.

2. When applying for a credit card - If you have a good score, you will be eligible for better interest terms, higher credit limits, certain kinds of awards or waiving of some fees.

3. When applying for a job - Potential employers can ask for your credit score to judge if you demonstrate a consistent pattern of financial responsibility. This is especially important in sensitive jobs in the financial sector or in compliance roles.

4. When planning to rent - In advanced credit economies, like the U.S., landlords can request the credit agencies for your credit score to judge if you can be trusted to meet your rental payments. This might be the case in future in India as well.

Advantages of High Credit Score :

1. A high credit score means that you will have faster access to credit and on much better terms.

2. Your loan/credit card application will be approved much more quickly. With a high score, the approval is completed in a matter of days, if not less.

3. The bank/credit card company will offer you the loan at lower rates of interest since they are confident that you will repay on time.

4. A good score might also result in a longer loan period.

5. A person with a high score might also be eligible for a much larger loan amount - again, since the banks are confident that it will be repaid on time and in full.

It is always advisable to purchase and review your Credit Score and CIR prior to commencing your loan hunt. It helps you:

To understand what the lender will review while evaluating your application.

To identify and rectify any discrepancies in your CIR and thereby prevent unwelcome surprises during the loan evaluation process.

Reasons for a low credit score:

These are some of the common reasons for a low credit score:

Delayed repayments: Many people do not realize that even one or two delayed credit card payments can affect your credit score and cause it to drop.

Missed payments: Sometimes due to an unforeseen emergency, you may not be in a position to make your payments. If you miss any payments, it will be recorded in your credit history and lead to a drop in your score.

Lack of credit history: If you have not borrowed for a loan or had a credit card account, you will not have much of a credit history. This too can lead to a low credit score.

Administrative error: Occasionally, there may be an administrative error that results in wrong information being recorded on your credit report. Sometimes, this might be the result of fraudulent activity as well.

In general, it is advisable to have a credit score of 750 or above in order to be in good credit standing with banks and other lenders.

How can I repair my credit on my own?

First, you need to obtain a copy of your credit report and study it to see what your credit problems are.

Below are some of the more common issues involving credit repair and resolving them on your own:  

Administrative/reporting errors: If you identify any mistaken entries that are dragging down your score for no fault of yours, you need to report it to the credit bureau immediately and file a dispute.

Large number of missed or delayed payments: Making all your payments in time and in full will significantly help increase your score.

High credit utilization rate: If you spend more than 50% of your total credit limit on your credit card, it signals that you are hungry for credit. This will cause your score to drop. You will need to work on reducing your monthly expenses and bringing down your credit utilization rate.

Large number of credit accounts: If you have numerous loans and credit cards accounts, it implies that you have insufficient credit and need to tap multiple sources to fulfill your financial obligations. If this is an issue for you, you will need to optimize the number of credit accounts so that you have a healthier credit profile.

Guarantor: Be aware in case of providing any guarantee to others. A guarantor on any form of loan is equally responsible to ensure the repayment of the loan.

Avoid multiple loan/ credit card applications in a short span of time: If you have too many enquiries in a short span of time, it is not looked at very positively. It shows that you are credit hungry and looking for multiple sources of credit.

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Published by

CA Maheshwar Reddy
Category Professional Resource   Report

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