What Is The Role Of The CIBIL™ Score In Credit Rating In India

The CIBIL^TM score and report play a very important role in credit ratings in India. It is used by lenders to evaluate your financial discipline and your repayment capacity. Let us understand what the CIBIL™ score is in detail and its importance in evaluating an individual’s creditworthiness. 

What Is CIBIL™, CIBIL™ Report, and CIBIL™ Score?  

CIBIL^TM  or Credit Information Bureau (India) Limited is the most widely used credit rating agency with Equifax, Experian, and CRIF High Mark being the other three authorized credit bureaus in India that also offer credit scores. It tracks all the credit-related activities of individuals and businesses, including all loan and credit card transactions. 

Things that are recorded in your CIBIL^TM  report are 

• Every loan or credit card repayment that was done (or not done or delayed) 
• All applications for a loan or a credit card
• The approval or denial of applications. 
• The number of credit accounts
• The total credit limit
• The credit balance
• The credit utilization ratio and other appropriate information

 

A CIBIL^TM score is a 3-digit number in the range of 300-900 given by CIBIL^TM .  It summarizes your credit history. This number is used by banks and other financial institutions to check the creditworthiness of the consumer. An ideal CIBIL^TM score should be between 750-900. Lenders evaluate the repaying ability of a consumer using the CIBIL^TM score. The table below shows the various ranges of CIBIL^TM scores and how they can be interpreted. 

 

How is the CIBIL™ Score Computed? 

The CIBIL™ score is mainly impacted by the following 4 factors. 

• Payment History: Your score dips if you make late payments or default on your EMIs. 
• High Credit Utilization: A high credit utilization ratio will indicate that your debt is rising and it may cause a dip in your credit score. 
• Multiple Inquiries: Multiple inquiries indicate that your debt or liabilities might increase in the future. 
• Credit Mix: It is ideal to have a balanced ratio between secured and unsecured loans. 

Why is CIBIL^TM Score Important?

A CIBIL^TM score is calculated and based on data collected from lending institutions. It is mainly impacted by factors such as payment history, credit mix, high credit utilization, and multiple inquiries. It is based on facts and hence a very reliable source for lenders to evaluate the creditworthiness of an individual. 

Let us now see why the CIBIL^TM score is very important for lenders.   

1. It Indicates Your Creditworthiness – The CIBIL^TM score indicates your creditworthiness. The higher your score is, the higher the probability of you paying your debts on time. It is also a good way for the lender to evaluate how much risk they are taking. 
2. Time taken for application approval -  When lenders see a higher CIBIL^TM score, they are more likely to expedite the application approval process, and hence fund disbursal will be faster. Many lenders are willing to give loans to people with a high CIBIL^TM score. 
3. Interest rates – The lender may give a preferential interest rate for applicants with a higher CIBIL^TM score. The reason behind this is that the lender perceives such applicants as individuals who have good financial discipline and can make their loan repayment on time. 
4. Loan tenure – The lender might also offer flexible loan tenures to the borrower. This is because a certain level of trust is already established because of a higher CIBIL^TM score.
5. Chances for negotiation – With a high CIBIL^TM score, you can negotiate for lower interest rates with the lender. Lenders give favourable interest rates for those with a higher  CIBIL^TM score. 

 

CIBIL^TM Score and Its Impact on the Loan Approval Process

The CIBIL^TM score plays a very important role in the loan approval process for various types of loans. 

Let us see how different types of loan approval processes are linked to the CIBIL^TM score

1. Personal Loan Approval Process - Personal loans are unsecured loans that are taken to meet immediate expenditures like marriage expenses, medical emergencies, travel expenses, etc. Lenders give pre approved offers for personal loans to already existing customers. They base it on several factors, and one of them is your  CIBIL^TM score. The higher the score, the lower the interest rates and the faster the loan approval. 
2. Home Loan Approval Process - A CIBIL^TM score between 750 to 900 is considered as excellent for quick loan approval and disbursal. Applicants with higher CIBIL^TM scores will be offered lower interest rates with waivers on certain charges. 
3. Auto Loan Approval Process – A CIBIL^TM  score of 700 plus is ideal for auto loans. If the score is lower, you might still get an auto loan but with higher interest rates. The loan approval process may also take more time.

How to Obtain A Personal Loan Without A CIBIL^TM  Score? 

First-time loan applicants may not have a CIBIL^TM  score or a history. Such people can still get a personal loan by showing a steady income and longevity with a company etc. Lenders will evaluate you based on your income sources and how long you are working for a company. Once you get your first loan, repaying your debts on time will help you build a good credit history and score. 

How To Obtain A Personal Loan If You Are A CIBIL^TM Defaulter?

Even if you have defaulted on your CIBIL^TM score, you can still get a personal loan. But, the lender may either raise the interest rate or lengthen the loan tenure. These are some of the ways in which individuals with a low CIBIL^TM score can get a personal loan

• Applying with a co-applicant  
• Taking a loan with collateral or a secured loan
• Borrowing at a higher interest rate
• Improve your credit score before applying 
• You can opt to apply with online lenders   

Conclusion

The CIBIL™ score reflects your creditworthiness and lenders mainly rely on this numeral to evaluate your creditworthiness. So, start checking your credit profile regularly and take steps to boost your credit score. Then, enjoy quick approval and easy disbursal of loans. 

FAQS What Is The Role Of The CIBIL™Score in Credit Rating in India

1) What are the various types of CIBIL™ scores?

CIBIL™ collects credit information across its three divisions - Consumer Bureau, commercial bureau, and microfinance institution bureau. It then generates credit Information reports (CIR) and CIBIL™ scores for individuals and CIBIL™ commercial reports and  CIBIL™ ranks for commercial enterprises.

2) What are the components of the CIBIL™ score?

The various factors or components of the CIBIL™ score with their weightage are: payment history - 30%, credit exposure - 25%, credit type and duration - 25%, and other factors - 20%.