Credit Score: What is a Cibil score?, Definition, Factors, and How to Improving It?

What is a Credit/Cibil Score?

CREDIT SCORE is also known as CIBIL SCORE. CIBIL scores play a vital role in the financial lives of individuals. Financial institutions give loans on the basis of credit scores. A credit score consists of three numbers. If the credit score is good then the loan is easily available and at a very good interest rate. But if your credit score is low, lenders may consider you a
risky borrower and may either decline your loan application or offer you a
high-interest rate.  Cibil Score is a
snapshot of your credit history and current financial situation.

 

How
is a credit score calculated?

A credit score is calculated using various factors of finance and complex mathematical algorithms. While the exact formulas used by credit
scoring models are proprietary and not publicly available, here are some of the
key factors that can affect your credit score:

 

1. Payment history(35%): Payment history is the most important factor in determining
   your credit score. Late payments or non-payment etc. negatively impact the CIBIL score
2. Credit utilization(30%): This is the amount that is fixed relative to the credit limit. The less you use credit, the better your credit score will be.
3. Length of credit history(15%): Longer credit history increases your CIBIL score. Banks or financial institutions prefer to give loans only to those people who have a long credit history.
4. Types of credit(10%): Various financial assets such as auto loans and bonds increase the credit score.
5. Recent credit inquiries(10%): Borrowing should be done at least as often because borrowing more frequently lowers the credit score ranking.

How do Credit Scores Work?

A credit score is a three-digit number like 250, 400, etc. that represents an individual's
creditworthiness. It is based on their credit history and is used by lenders to
determine their likelihood of repaying debt. The higher the credit score, the
better the individual's creditworthiness.

Credit utilization is the second most important factor, accounting for 30%
of the credit score. Through the credit utilization factor, it can be ascertained that how much credit has been utilized by the individual.

The length of credit history looks at how long an individual has had credit accounts open and how
frequently they have used credit. Individuals with a longer credit history and
a good track record are seen as less risky borrowers.

Types of credit make up 10% of the credit score. This factor looks at the
different types of credit an individual has, including credit cards,
installment loans, and mortgages. Individuals with a mix of credit types are
seen as less risky borrowers.

 

Why is a credit score important?

Your credit score can impact many aspects of your financial life. Here are
some reasons why having a good credit score is important:

• Loan approval: Lenders use your credit score to determine your
  creditworthiness. 
• Interest rates: Having a good credit score allows banks to offer you loans at better interest rates and lower interest rates on credit cards.
• Credit card applications: Many credit card companies require a minimum
  credit score to approve your application. Having a good credit score can
  increase your chances of being approved for a credit card with good rewards and
  benefits.
• Insurance premiums: Insurance companies also determine the premium for insurance through credit scores. The better the credit score, the lower the premium.
• Rental applications: Landlords may use your credit score to determine
  whether you're a reliable tenant. 

 

How to improve your credit score?

If you have a low credit score, don't worry; there are several ways to
improve it. Here are some simple steps you can take to improve your credit
score:

• Check your credit report: The first step in improving your credit score is
  to check your credit report. A credit report shows your loan or loan repayment etc. You can obtain a
  free credit report once a year from the major credit bureaus. Check your report
  for any errors or discrepancies and report them immediately.
• Pay your bills on time: It is mandatory for every person to pay the loan or bill on time. If there is a delay in making the payment, there may be problems in getting loans or credits in the future.
• Reduce your credit utilization: Credit should be used only below the credit limit prescribed by the financial institution when required. The counselors believe that credit utilization should be less than 30% of whatever credit limit is fixed. Failure to do so may result in a bad credit score.
• Don't close old credit accounts: The longer the credit history, the better the credit score. That's why one should never close old credit accounts.
• Limit new credit applications: When applying for new credit with a financial institution, rigorous scrutiny of the credit report is done. Too many inquiries can
  negatively impact your credit score. 
• Consider a secured credit card:  A secured credit card
  requires a security deposit, which becomes your credit limit.
• Use credit responsibly: Finally, use credit responsibly. Only charge what
  you can afford to pay back and avoid maxing out your credit cards. Responsible
  credit usage can help you maintain a good credit score.

 

 

What is a good credit score to have?

Credit scores are measured in numbers ranging from 300 to 850, with a score of 650 or above indicating a good credit score. This
means you are likely to be approved for credit and may qualify for lower
interest rates on loans and credit cards.

Loans with a credit score below 670 can be difficult to get as well as loans at higher interest rates A
score below 580 is considered a poor credit score, which can make it difficult
to get credit or qualify for loans at all.

The length of credit history, type of credit and frequency of taking credit or loan from the bank, and many other factors have a positive or negative impact on the credit score. Keeping these factors in mind and practicing responsible credit habits
can help you maintain a good credit score.

 

 

Who calculates credit scores?

Credit scores are typically calculated by credit bureaus, also known as
credit reporting agencies. These companies generate reports by calculating credit scores based on the loan, lender, and other financial reference factors.

Transunion Credit Information Bureau (India)Limited, Equifax, Experian, and Crif High Mark, etc. bureaus calculate the credit score. Each of these bureaus has its own proprietary formula
for calculating credit scores, which is why you might see slight differences in
your score when you check it with each bureau.