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How to calculate CIBIL score and contributing factors of it

Key Takeaways

  • Key components influencing your credit score include credit history, repayment track record, and credit mix.
  • Maintaining a CIBIL score above 750 is ideal for securing loans and credit cards at favourable terms.
  • IDFC FIRST Bank's FIRST WOW! credit card can help you manage credit efficiently, potentially boosting your CIBIL Score through responsible usage.
01 Jan 2025 by Team FinFIRST

 

Your CIBIL score is more than just a number, it displays your financial health and creditworthiness. This three-digit score, ranging from 300 to 900, plays a crucial role in determining your eligibility for loans and credit cards. A higher score signifies responsible credit behaviour, making you a preferred customer for the banks and financial institutions. Factors like timely repayments, credit utilisation, and credit history directly impact this score, influencing your financial future. Let’s understand how the CIBIL score is calculated and what influence it holds on your loan application and approvals. 

What is a CIBIL score?
 

A CIBIL/Credit score is a three-digit numerical representation of your creditworthiness, generated by credit unions. The score ranges between 300 and 900, with a higher score indicating stronger credit health. Banks and financial institutions use this score to assess the risk of extending credit to you. It is influenced by various factors, including your repayment history, credit mix, and the length of your credit history.

Four major credit bureaus calculate credit scores in India -

  • TransUnion CIBIL
  • Equifax
  • Experian
  • CRIF Highmark

Since the credit scores released by CIBIL are the most common, credit score is also referred to as a person's CIBIL score. It is a three-digit number that ranges between 300 and 900.

CIBIL Score components
 

Your CIBIL Score is determined by several components, each contributing to your overall creditworthiness:

1.  Repayment history: This is the most significant factor. A consistent record of timely repayments on loans and credit cards positively impacts your score. Late payments, defaults, or settlements can significantly lower your score, reflecting negatively on your financial responsibility.

2.  Credit utilisation ratio: This ratio measures the percentage of your available credit limit that you are currently using. A lower credit utilisation ratio indicates that you are not overly reliant on credit, which is favourable for your score. For example, if your credit card limit is ₹1 lakh, it’s advisable to use only up to ₹30,000 to maintain a healthy score.

3.  Length of credit history: The longer your credit history, the better. A lengthy credit history provides more data on your repayment behaviour, making it easier for lenders to predict future behaviour. It also means that you have had more experience managing credit over time.

4.  Credit mix: A diverse mix of credit types, such as home loans, personal loans, and credit cards, can improve your score. It shows that you can manage different types of credit responsibly. However, having too much unsecured credit, like personal loans, can negatively impact your score.

5.   New credit inquiries: Every time you apply for credit, lenders perform a hard inquiry on your credit report, which can slightly lower your score. Multiple inquiries in a short period suggest a higher credit risk, thus lowering your score.

How is your CIBIL score calculated?
 

Your CIBIL score is calculated using an algorithm that analyses various data points from your credit report. Each component mentioned above is weighted differently, contributing to the overall score.

The CIBIL calculation considers your repayment history, which forms 35% of the score. If you have consistently paid your EMIs and credit card bills on time, you will likely have a higher score. Next, it looks at your credit utilisation ratio. A lower ratio (ideally below 30%) is seen as positive, contributing to 30% of your score. The length of your credit history is then evaluated; longer histories positively influence 15% of your score. The diversity in your credit accounts (credit mix) adds another 10%, reflecting your ability to manage various types of credit. Finally, new credit inquiries contribute 10% to your score, with frequent inquiries potentially reducing it.

It’s important to note that this calculation is dynamic, your score can change based on your credit behaviour. Using credit cards like the IDFC FIRST Bank FIRST SWYP EMI credit card responsibly can help improve your score over time. The card comes with fixed monthly conversion fee and no interest charges, on eligible merchants and purchases. Thus making it easier for you to convert your expenses into EMIs. You also get to enjoy several discounts on shopping and travel expenses and attractive reward program on incremental spending that you should never miss on.

Factors that affect CIBIL score

  1. Credit history: Late payments or defaults significantly reduce your CIBIL score. Consistently paying EMIs and credit card bills on time is crucial.
  2. Credit diversification: A balanced mix of secured (home loan) and unsecured (credit card) credit is beneficial. A high volume of unsecured credit can lower your score.
  3. Credit utilisation ratio: Using more than 30% of your credit limit can negatively impact your score. Maintaining a lower utilisation ratio is advisable.
  4. Credit profile: A longer credit history is advantageous as it gives lenders more information to assess your creditworthiness.
  5. New credit inquiries: Frequent credit inquiries within a short period can indicate financial stress, thereby lowering your score.

What is an ideal CIBIL score you should maintain?
 

An ideal CIBIL score to maintain is 750 or above. This score range is considered excellent by most lenders, enhancing your chances of securing loans and credit cards with favourable terms and interest rates. A high score reflects strong credit management, making you a low-risk borrower in the eyes of lenders.

CIBIL score range
 

CIBIL scores range between 300 and 900, with specific ranges signifying different levels of creditworthiness:

  • 300-549: Poor – This range indicates a high risk of default.
  • 550-649: Fair – Improvement is needed to access better loan options.
  • 650-749: Good – This range is acceptable, but there’s room for improvement.
  • 750-900: Excellent – A score in this range ensures easy access to loans and credit cards with attractive terms.

CIBIL score calculation for home loan & personal loan
 

When calculating eligibility for a home or personal loan, banks prefer applicants with a CIBIL score of 750 or above. For home loans, the score is crucial, as it helps lenders assess your ability to manage long-term debt. A higher score often results in better interest rates. For personal loans which are unsecured, a strong score becomes even more critical, as it assures lenders of your creditworthiness.

Lenders, including IDFC FIRST Bank, check an individual's creditworthiness before accepting their home loan request to assert borrowers’ creditworthiness. Follow the seven simple steps mentioned below to check your CIBIL score before applying for a home loan.

  • Visit https://www.cibil.com/freecibilscore.
  • Click on the 'Get your free CIBIL score' tab.
  • Enter the required information as requested on the next page and click 'Accept & Continue.'
  • Enter the OTP received on your registered mobile number and click on 'Continue'.
  • You have now enrolled on the CIBIL website. Now, click on 'Go to dashboard'.
  • Once you land on the homepage, click on 'Member login' to log in to the account that you just created.
  • After logging in, the site will display your CIBIL score.

Smart tips to improve your CIBIL score
 

  • Pay your bills on time: Timely repayment of credit card bills and EMIs significantly boosts your CIBIL Score. Set reminders or use auto-debit facilities to avoid missing due dates.
  • Maintain a low credit utilisation ratio: Keep your credit utilisation below 30% of your available limit. If your limit is ₹1 lakh, try not to use more than ₹30,000.
  • Avoid multiple loan applications: Each loan application results in a hard inquiry on your credit report, which can lower your score. Space out your credit inquiries to avoid a negative impact.
  • Secured credit cards: Most credit cards require having a good credit score. However, if you don’t have a credit score, consider opting for a secured credit card like the IDFC FIRST Bank FIRSTearn virtual credit card to start building it. Secured credit cards are issued against fixed deposits as collateral with a minimum credit limit of 100% of FD value. As such, they do not require credit scores to qualify for them. Over time, with timely payment and responsible use, you can build a good credit profile to take advantage of better loan rates and premium credit products in the future. 
  • Monitor your credit report: Regularly check your credit report for errors or discrepancies that could be affecting your score. If you find any, report them immediately for correction.
  • Use credit wisely: Ensure that you use your card and loans responsibly, paying off the full balance each month to avoid interest charges and boost your score.
  • Co-sign cautiously: If any of the co-signers/joint accountholders default on their payment on the loan, your score will suffer too. Exercise caution and only co-sign for people you fully trust. 

Conclusion
 

Your CIBIL score significantly impacts your financial journey, influencing access to loans and credit card approvals. Managing your credit responsibly with actions like paying bills on time, maintaining a low credit utilisation, and diversifying your credit profile can steadily build a strong score. Cards like IDFC FIRST Bank's FIRST SWYP and FIRSTearn can assist in managing your credit effectively, offering a reliable way to establish and boost your CIBIL score. Additionally, the offers and rewards IDFC FIRST Bank credit cards provide are something that you must always grab on to maximise your benefits.

 

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same 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 IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.