How CIBIL Score Works
Posted: Jun 22, 2016
What is a Credit Score?
A credit score is a three-digit number generated by using the credit information of an applicant. The number is generated by applying mathematical algorithms to the credit information.
CIBIL Score as a Credit Score
Credit score in India is called a CIBIL TransUnion Score. CIBIL collects and maintains records of the loan payments and the payments of the credit card of an individual. These records are submitted by the banks and other financiers to CIBIL on a monthly basis. This information is used to create Credit Information Reports (CIR) and CIBIL TransUnion Scores. These credit scores are provided to banks and other lenders in order to evaluate loan applications.
What does bad CIBIL score actually mean?
A credit score is based on an individual's entire financial history. The financial history includes all the debts and the credit information.The factors which affect a CIBIL score are:
The repayment history (35%)
The amount you owe to lenders (30%)
Number of years of servicing debt (15%)
Number and amount of recent loans taken or applied for (10%)
The Credit Mix (10%)
A bad CIBIL TransUnion Score is due to one or more of the following reasons:
- When an individual default on the loan repayments.
- When an individual extensively shops for a loan and repeatedly gets rejected.
- When an individual has never taken a loan in the past and no credit history is available to validate.
Application for a Loan
When an individual applies for a loan through an application form, the lender checks the CIBIL score and credit report for that individual. If that person has a bad credit history with a low CIBIL score, the lender usually rejects the loan application. But if the credit score is good, the bank will consider loan application and pass it through for approval. A credit score of above 750 is considered a very good score and is mostly approved.
CIBIL scores are the deciding factors when considering and approving a loan application. The higher the score, the higher will be the chance of loan approval. However, the approval of a loan application completely depends on the bank. A lower CIBIL score may be accepted by a lender but then the interest rates offered will be high so having a good score would be a better thing to do.
I am Padam Chhabra, a finance guide, an itchy feet traveler and a gourmand.