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UNDERSTANDING YOUR CIBIL SCORE

What is the CIBIL Score?

The CIBIL Score is a 3 digit numeric summary of your credit history. The Score is derived by using the details found in the “Accounts” and “Enquirers” sections on your Credit Information Report (CIR) and ranges from 300 to 900. The closer your Score is to 900, the more favorably your loan application will be viewed by a credit institution. The Score plays a critical role in the loan approval process.

What does my score Mean?

The score tells a credit institution how likely you are to pay back your loan based on your past pattern of credit usage and loan repayment behavior. The closer you are to 900, the more confidence the credit institution will have in your ability to repay the loan and hence better the chances of your application getting approved.

What are the major factors that affect my score?

There are 4 (Four) major factors that affect your score. These are described below.

  1. Late Payment or Defaults in the Recent Past:
    • Your Payment history will have significant impact on your score. Hence if you have missed payments on any of your existing loans, over the last couple of years, your score is likely to be negatively affected because it indicates that you are having trouble in servicing your existing obligations.
  2. High Utilization of Credit Limits
    • While balances on your loan will only reduce over a period of time as payments are made, you must be diligent about making timely payment on your credit cards.
    • While increase spending in your credit cards may not necessary negatively affect your credit score, an increase in current balance in your cards over time is an indication of an increased repayment burden and may negatively impact your score. It always prudent not to use too much credit.
  3. Higher Percentage of Credit Cards or Personal Loans (Commonly known as unsecured loans) on your CIR
    • A higher concentration on home loans and auto loans (commonly known as secured loan) is likely to be more favorable for your score than a large number of unsecured loans.
    • Although unsecured loan offers easy access to finance, it's also by far the most expensive form of credit . More the number of unsecured loans with high utilization, large are the repayment resulting from its high rate of interest.
  4. Seeking Excessive Credit.
    • If you have made any application for loans in a short period of time or have recently been sanctioned new credit facilities, a credit institution is likely to review your application in caution.
    • This behavior of seeking excessive credit facilities indicates that your debt burden is likely to or has increased and you are less capable of honoring any additional debt, leading to a marginal impact on your credit score.
Source: TransUnion CIBIL Limited

Compiled By
CA.R.Jeyarajan FCA., CISA(USA)
(Chartered Accountant)

Can be reached at jeyarajan@rareassociates.in


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