Understanding CIBIL Score: What It Is and Why It Matters

Financial literacy is very important today in India, particularly for understanding credit. It’s hardly possible to talk about personal finance without mentioning the CIBIL score because it is a determinant of one’s loan or credit card approval.

However, what is it? Why is this term so crucial? In this blog post, we will uncover what CIBIL score refers to and discuss its importance as well as how this affects our finances.

The Credit Information Bureau (India) Limited Score is abbreviated to CIBIL Score. It starts at 300 and ends at 900, whereby each individual is supposed to evaluate themselves based on their past borrowing behaviour or spending habits respectively. A higher score signifies strong creditworthiness, making you a preferred borrower for banks and financial institutions.

Importance of CIBIL Score in India

Your CIBIL score is more of a mirror of your economic actions than just a number. This is why most creditors in India heavily refer to it when processing your loan application.

• Loan Approval: A good CIBIL score increases your chances of getting loans approved quickly. Most lenders in India prefer a score of 750 or above.
• Interest Rates: Higher scores can make you eligible for lower interest rates on your loans and credit cards.
• Small Business Loans: However, those with low scores might find it hard to secure low CIBIL score business loans; they are generally perceived as risky clients by money lending agencies.

Also Read: Looking to Check Your CIBIL score? Here’s How You Can Do It Easily

How Is CIBIL Score Calculated?

To maintain or improve your CIBIL score, you need to understand the factors contributing. These include the following:

Payment History (35%)

Any timely payment of credit cards or loans will always lead to increased scores.

Scores drop significantly due to missed payments or defaults made against it.

Credit Utilisation (30%)

• This implies over-reliance on borrowing finances when one uses a larger percentage of their total credit card limit, thereby implying dependency on credit sources, which has a likelihood of causing negativity towards their creditworthiness.

Credit Mix (10%)

• An ideal approach is to have an equal distribution between secured (for example, home loans) and unsecured (like personal loans) loans.

Credit Inquiries (10%)

• This means that each time an individual applies for many loans or credit cards, it will be hard for them as there will be frequent hard inquiries, thereby lowering their scores.

Length of Credit History (15%)

• At any time when one has been using credit consistently over an extended period then his points will be good for a long period.

What Is Considered a Good CIBIL Score?

In India, CIBIL score usually falls into four categories as follows:

• Excellent (750-900): At this range it’s easy for banks/lenders to approve your loan as well as offer lower rates on credit.
• Good (650-749): In this case scenario, most of the banking institutions would approve the loan without any hesitation but not always with better conditions than what they used when dealing with clients having higher scores.
• Average (550-649): People whose scores are between these values have to pay more money for interest, or they may be subjected to tough borrowing conditions.
• Poor (300-549): Being rated as a high-risk customer, you will find it very challenging to access credit facilities.

Why Do You Need a Good CIBIL Score?

A good CIBIL score has several advantages for both individuals and businesses:

• Readily Available Loans: Individuals who have high scores are more likely to be granted loans.
• Loans With Low Interest Rates: It is common for borrowers with high credit scores to secure loans at favorable market rates.
• Improved Credit Card Deals: Premium credit cards with enhanced features are in store for you if you have high scores.
• Funds For Businesses: Entrepreneurs who maintain impressive scores find it easy to obtain business loans. Failure to meet the minimum score requirement when applying for a business loan may attract higher interest rates or stricter conditions.

How to Check Your CIBIL Score?

Checking your CIBIL score in India is straightforward and typically costs nothing for the first yearly report:

• Either visit the official CIBIL website or make use of financial service providers.
• Provide some personal information such as name, PAN (Permanent Account Number), and email ID.
• Authenticate yourself, and then get ahold of your credit report.
• It is always advisable to check your score from time to time to verify that there are no errors.

How Does a Low CIBIL Score Impact You?

A low CIBIL score can have several drawbacks, especially when you need access to credit. Here’s how it can affect you:

• Loan Rejections: Lenders may reject your applications outright.
• Higher Interest Rates: If approved, loans may come with higher interest rates.
• Difficulty in Business Loans: Entrepreneurs with low scores may struggle to secure low CIBIL score business loans, which are often essential for expanding operations.

To avoid these issues, understanding the CIBIL score meaning and maintaining a good score is critical.

Tips to Maintain a Good CIBIL Score

• Pay On Time: Always clear your credit card dues and EMIs before the due date.
• Keep Credit Utilisation Low: Use less than 30% of your available credit limit.
• Avoid Multiple Applications: Too many credit inquiries can reduce your score.
• Monitor Your Report: Check your credit report regularly for errors and discrepancies.
• Maintain Old Credit Accounts: Longer credit histories positively impact your score.

The Bottom Line

Understanding your CIBIL score meaning and its impact on your financial life is essential in today’s credit-driven economy.

If you’re someone looking to apply for a business loan or a home loan, understand that maintaining a healthy CIBIL score can unlock better opportunities. Regular monitoring and disciplined financial behaviour are key to keeping your score high.

Moreover, you can check your monthly EMIs with the help of our business loan calculator before applying for a business loan so you can easily focus on meeting your financial goals instead of stressing about calculating monthly EMIs.

FAQs

Q.1. What is the CIBIL score, and why is it important?

A. CIBIL Score is a 3-digit number indicative of your credit history. In your CIBIL report, the number ranges from 300 to 900. The closer your score is to 900, the higher the chances of your loan application getting approved.

Q.2. How much CIBIL score is good?

A. A score above 750 is generally considered a good CIBIL score.

Q.3. What is CIBIL full form?

A. The full form of CIBIL is Credit Information Bureau (India) Limited.

Q.4. How can I check my CIBIL score?

A. You can check your CIBIL score by visiting the official CIBIL website and requesting a credit report. Some banks and financial institutions also provide free CIBIL score checks through their online banking platforms.

Q.5. How can I improve my CIBIL score?

A. To improve your CIBIL score, ensure timely repayment of loans and credit card bills, maintain a low credit utilisation ratio, avoid multiple loan applications in a short period, and regularly check your credit report for errors.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.