Know-How is Your Credit Score is Calculated
When you apply for a loan, the lender will first consider your CIBIL TransUnion credit score. Credit Information Bureau India Limited is the abbreviation for CIBIL. Transunion’s CIBIL score is a three-digit value that runs from 300 to 900. A score of over 725 is considered an excellent credit score.
A higher credit score always increases your chances of being approved for a loan. If you have consistently maintained a good credit score and are applying for an unsecured loan, such as a personal loan, you can even negotiate a lower interest rate.
How Is Your CIBIL Score Calculated?
Generally, the credit bureau calculates the CIBIL Score based on a variety of significant factors. These include the following:
In the event of missed payments or default on your equated monthly installment (EMI), your credit score would suffer. It is a critical aspect in determining your CIBIL Score.
Frequent usage of credit suggests that the applicant is overly reliant on credit and that any unfavorable event might drive him toward loan default. Lenders favor borrowers that have a credit usage percentage of less than 30%.
Numerous inquiries paint a picture of credit desperation and lenders are hesitant to approve such individuals’ credit applications. Thus, it is suggested that you only make a hard inquiry if you are certain of obtaining a loan. Regular credit checks, on the other hand, are considered soft inquiries and have no effect on your credit score.
Number of loans Applied and Availed
The Credit Bureau will keep track of the number of loans you have implemented in the past and the percentage of loans that were granted. If many loans are denied, this might have a detrimental effect on your credit score.
To create a solid credit history, you should have a healthy balance of secured and unsecured credit. However, this criterion is weighted quite lightly in determining your score.
Factors That Impact the Calculation of the CIBIL Score
A favorable credit score does not automatically guarantee that your loan application will be approved. Additionally, before disbursing the loan to you, the lender will analyze a variety of variables. Consider the following key aspects that contribute to the computation of the CIBIL score.
Your credit score is determined by the history of your credit. It is the most important factor in determining your CIBIL score, accounting for 30% of your total score. Banks and financial organizations communicate with credit bureaus for both personal and credit-related information.
After then, the credit bureau compiles all of the information and calculates your credit score. The credit bureau has kept track of your monthly payments on bills and EMIs for the last three years.
Additionally, the credit report will contain information about the status of each account, including whether it has been paid or written off, as well as the total amount owed.
Additionally, it contains information on your days past due, which refers to the payments you have made. Therefore, if you have ever defaulted on a loan or made late payments on a credit card, it will have a negative effect on your credit score.
Credit usage percentage refers to the amount you owe to lenders as a proportion of the total loan amount available to you. It accounts for 25% of your credit score calculation. To determine your credit usage, you’ll need two important information, your credit limit and the amount of credit you’ve taken out.
Credit usage is calculated by dividing loan outstanding by credit limit. Credit agencies see gradual increases in credit consumption adversely. It demonstrates that the borrower’s debt burden is increasing over time and provides the credit bureau with a poor impression.
Credit Mix and Duration
Your CIBIL score is also affected by the makeup of your credit portfolio; specifically how many secured and unsecured loans you possess. It accounts for 25% of the weighting in calculating your CIBIL score.
Secured loans include auto and housing loans that are collateralized, whereas personal loans and credit card debt are unsecured loans that are not secured by collateral.
Your credit score will be impacted by any default or late payment on any type of loan. However, a greater weight for unsecured loans indicates that your score would be lower than someone who has never taken out an unsecured loan, even if both of you have made on-time payments.
When secured loans are returned on time, they have a significant favorable effect on your credit score.
Other criteria, such as the number of recent credit applications, contribute to the remaining 20% of the CIBIL score computation. Your credit report will include this information under the Enquiry section. Increased credit application activity creates a poor image with the credit bureau since it depicts the applicant as a credit-hungry individual.
Generally, a CIBIL Score between 700 and 900 is considered optimal for loans or credit. A high credit score increases your chances of being approved for a loan. A minimum credit score of 750 is regarded as favorable when applying for a personal loan, house loan, or vehicle loan.