CIBIL Score: 4 influencing factors and how to interpret it

CIBIL score is gaining its prominence among financial institutions as a source to understand credit worthiness of a customer. Let’s understand how CIBIL actually works: CIBIL (Credit Information Bureau of India Limited) acts like an information data base of customers of different banks. If one has credit card or loan against their name, the respective lending authority will update the same to CIBIL. CIBIL maintains analyzes the record of how efficiently the payments were made. Every enquiry for a credit card or loan will be updated in CIBIL records. Whenever a request is placed by the individual for a credit card or loan, the financial institutions contacts CIBIL to assess the credit worthiness of the individual.

Factors which Influence your CIBIL Score:

1. Payment History: The payment history of an individual represents the financial state of an individual. As per CIBIL’s assessment, if the payments are made as per the schedule and in the given time lines, it is considered as a positive sign. Late payments or defaults on the loans and credit cards indicate the financial troubles of the individual.

2. Usage of credit limits: This factor is highly pertinent to credit card usage. It is considered as a negative sign if an individual consistently consumes 80-90 percent of the card limit. Increase in the current balance of the credit card over a time period is a sign of increased repayment burden.

3. Number of loans and credit cards: Home loans and car loans are considered as secured loans and credit cards and personal loans are considered as unsecured loans. While higher number of secured loans impacts the CIBIL score positively, higher number of unsecured loans impacts it negatively.

4. Credit Hungry: Repeated applications for credit cards or loans signify the credit hungriness of an individual. Every enquiry made for any form of credit is reported to CIBIL. The lenders maintain caution in case of such individuals who are repeatedly trying for some or other form credit.

How to Interpret your CIBIL Score

CIBIL Score can be broadly classified into three categories:

1. NA or NH

The individuals who are categorized under this section :

• Do not have a credit history.
• Do not have sufficient credit history to rate them.
• Do not have any credit activity in the past two years prior to enquiry.

The individuals who fall in this category typically have no credit history and may have add-on credit cards. Even for the individuals who have cleared all their loans or not used their credit cards in the past two years, NA or NH rating is assigned. These scores do not signify any negative credit worthiness of any individual. However, some of the lenders have a credit policy which restrains them from providing loans to individuals under this category.
2. Risk grading Index : 1-5

This risk grading index is used for individuals who have a credit history of less than 6 months. The chances of loan approval and better interest rates are directly proportional to the risk index score. The risk grading scale ranges from 1 to 5. The risk grade of 1 and 2 signifies a high risk, 3 stands for medium risk, 4 and 5 stand for low risk. So higher index score is considered good in the terms of lender’s perspective.

3. CIBIL Score: 300-900

For the individuals who have a credit history of over 6 months, the CIBIL score ranges from 300 900. The score denotes the credit worthiness of an individual. This is how the lenders read the credit score: ”Higher the credit score, lower the chances of credit default by individual”. Majority of the new loans are issued to the individuals with a CIBIL score greater than 700. CIBIL score not only governs the loan approval, it also governs the interest rate on the loan. Higher CIBIL score can help individuals fetch best interest rates on their loans.