Your Credit Score – How It Is Calculated And Why Is It Important?

Before applying for credit, especially a loan, it is essential that you run a CIBIL check to know your credit score. This number, between 300 and 900, reflects your past behavior with credit. Lenders usually conduct a credit score check when they receive your loan application to ascertain the risk you pose of a potential default. 

This helps them decide whether to approve your application or not and even impacts the loan terms you are offered. Given the importance of your credit score in the borrowing and repayment journey, here’s everything you need to know about your CIBIL score.

How is your CIBIL score calculated?

Your CIBIL score is your credit score assigned by TransUnion CIBIL’s proprietary algorithm. TransUnion CIBIL is one of India’s oldest credit information companies, which collects data on individuals from banks and other financial institutions. Based on this information, your Credit Information Report (CIR) is created which has various details about your history with credit.

The information under your CIR’s Accounts and Enquiries sections makes the majority of impact on your CIBIL score. The Accounts section contains information on past and existing loans and credit cards you may have with the names of the various lenders. This may include car loans, home loans, personal loans and more along with their corresponding account numbers, date of opening and latest payment. It also contains a summary of dues you have as well as any missed payments or defaults in your history. The loan amounts and the monthly records of up to three years of your repayment are also captured here. The Enquiries section notes the number of times lenders have checked in with CIBIL to check your credit report to assess your loan or credit card application and the type of loan you have applied for.

Both these sections impact your score as your CIBIL score hinges on 4 major components. These are:

• Your repayment history
• Your experience with a mix of credit
• Your credit utilisation behaviour
• Your enquiries for credit

Here’s how each of them impacts your score for better or worse.

Making your EMI payments within the deadline and ensuring you’re paying your credit card bill in full in month and on time boosts your credit score. This financial discipline is exactly what lenders are looking for! Missing EMIs and clearing credit card payments after the due date means you either don’t have the funds to service the loan or are not disciplined. This lowers your score.

Having a history of repaying different types of credit, including both secured and unsecured loans shows that you are an experienced borrower, and this increases your score. Using up all the credit at your disposal may point to the fact that you are spending more than you can earn, and this is what high credit utilisation means. This causes your score to reduce, while low credit utilisation increases it. Similarly, if you have applied for too many loans and credit cards in a short period, you may come across as credit hungry and this lowers your score. It is best to apply for credit only when you need to and after checking if you can afford timely repayment.

Now that you know how your score is calculated, you can take the necessary action to increase your score or maintain it. Financial diligence is the key means to address a low CIBIL score.

What is a good CIBIL score?

Lenders usually view a CIBIL score of 750 or higher as a good score. A score like this helps you get a competitive rate of interest on your loan, helps you access credit faster, and allows you to get a higher loan amount too. This is why having a high CIBIL score is important for you as a borrower. While lenders may offer an instant loan for low CIBIL score applicants too, these may come at a higher interest rate and offer a lower loan amount too.

How to conduct a CIBIL check of your score?

It is easy to check your score on the official CIBIL website by creating an account and uploading an ID such as your PAN Card, passport or driver’s license. These IDs are usually asked as part of the KYC documents when you apply for a loan as well and you should ensure that they contain accurate information. You can do a CIBIL online check in this way once a year for free, after which you will need to pay for a subscription package. 

Alternatively, you can get your CIBIL score for free with Bajaj Finserv. Fill in a short form with your data and you can not only check your score but also get access to your Credit Health Report. That’s not all, if you have a reasonably good credit score, you may also qualify for a personalised offer for a number of loans and other financial products from Bajaj Finserv. So, what are you waiting for? Check your CIBIL score for free today!