What is the Relation between CIBIL score and Credibility?
Are you planning on applying for a loan in the foreseeable future? If yes, you must educate yourself about CIBIL scores and their weightage in proving your reliability as a loan candidate. But why so? What exactly is a CIBIL rating? How does it prove that you are creditworthy? Read on to find out.
What is the CIBIL score?
Your CIBIL rating is a three-digit (ranging from 300 – 900) numeric summary of your creditworthiness used by lenders to determine your loan repayment capacity. The full form of CIBIL is TransUnion Credit Information Bureau (India) Limited, and it is one of the four credit agencies in India.
Authorised by the Reserve Bank of India (RBI), CIBIL has access to all your credit information regarding past financial transactions where you have borrowed or repaid the money.
It helps lenders determine whether you are a dependable or risky borrower. Based on your CIBIL rating, your lender will determine your loan eligibility, loan amount, and interest rate. Also, with a high enough score, there is a chance you might qualify for a higher loan amount or a lower interest rate. This rating is dynamic and keeps changing based on your financial activity. You can now conduct CIBIL score check free seamlessly through online portals and apps.
How does CIBIL compute your score?
Your CIBIL rating is calculated based on the following five factors.
1. Repayment history
Your repayment history denotes how successfully you have been able to repay all your debt. This contributes to 35% of your score, making it the factor with the most weightage. Therefore, ensure that you make timely payments for all your credit instruments.
2. Credit balance and utilisation
Your credit utilisation is a ratio of the amount of revolving credit you are using and the total revolving credit available. Having a high credit utilisation ratio means that you have used up most of the available credit, making you a risky borrower. Keep your credit utilisation ratio to a minimum as it contributes to a whopping 30% of your score.
3. Duration of availing credit
Duration of availing credit refers to repayment tenure and timely repayment during this tenure. This factor contributes to 15% of your score.
4. New credit
New credit contributes to 15% of your CIBIL rating and specifically refers to your credit inquiries. Making too many credit inquiries and CIBIL score checks can make you seem credit-hungry and reduce your chances of obtaining a loan.
5. Credit mix
Your credit mix contributes to 10% of your CIBIL rating. Maintain a healthy credit mix by availing various types of credit and repaying them successfully.
How does the CIBIL rating define your credibility?
In the end, the goal is to establish your creditworthiness and show the lender that you’ve managed your finances and credit well in the past. And what better way to define your credibility than a metric that encompasses everything related to credit. A high CIBIL rating establishes your credibility by showing that:
- You’ve paid your dues on time
- You’ve managed the available credit judiciously
- You’ve been consistent in your repayments
- You’ve been sparse with new credit
- You’ve handled multiple lines of credit adeptly
Final word
Therefore, it is evident that your CIBIL rating and credibility go hand in hand. The higher your score, the higher are your chances of obtaining a loan. Make sure that you regularly conduct a CIBIL score check and make financially sound decisions to avail hassle-free credit in times of need.
