How is Your CIBIL Score Calculated?

The CIBIL score is a 3-digit numeric summary of an individual's credit repayment history. It is a score assigned by the Credit Information Bureau (India) Limited, or CIBIL. This score plays a significant role in determining the creditworthiness of a borrower.

The CIBIL score ranges from 300 to 900. The closer an individual is to 900, the better the chances of availing of a loan at favourable terms.

CIBIL score is calculated and assigned by one of the leasing credit information bureaus, TransUnion CIBIL. It calculates your credit score based on the following factors:

​1. Payment History

When it comes to credit score and particularly CIBIL score, payment history has the most weightage. If you have been paying your outstanding dues such as loan EMIs and credit bills in a timely manner, then your CIBIL score increases. On the contrary, if you are irregular in your payments or have defaulted previously, it affects your CIBIL score negatively.

2. Credit Exposure

Also known as the credit utilisation ratio, credit exposure is the second biggest factor after payment history, influencing your CIBIL score. It is simply the amount of credit you use in proportion to the credit limit allocated to you. It is advisable to keep the spending under 30% of your credit limit to have an optimum contribution to the CIBIL score.

​​3. Credit Type and Duration​

It is recommended to have a healthy credit mix of secured and unsecured credits such as personal loans and credit cards. It is helpful to have a long history of timely repayments in order to increase your CIBIL score.

4. Hard Inquiries

Lenders obtain your CIBIL report from credit rating agencies whenever you apply for credit, such as a Home Loan or a credit card. Such inquiries fall into the category of hard inquiries. Multiple hard inquiries can harm your CIBIL score. Hence, avoid applying for multiple credit lines simultaneously.

Generally, a CIBIL score of above 750 is considered ideal for approval for any credit and can increase your chances of approval if other eligibility criteria are in place.

If you want to improve your CIBIL score here are some of the tips to consider:

• Clear existing debts and pay credit card bills and EMIs on time
• Keep credit utilisation ratio below 30%
• Maintain a healthy mix of secured and unsecured credits
• Limit credit inquiry to a minimum

Practising healthy credit habits can help you improve your CIBIL score and increase your loan eligibility. With a high CIBIL score, individuals can enjoy competitive interest rates and better loan terms. After performing CIBIL score calculations, borrowers can improve CIBIL score by knowing the factors that affect their score.

Four different credit information bureaus in India are authorised to assign credit scores to borrowers. Each credit information bureau uses a different scoring model to calculate credit scores. However, since your credit score primarily depends on how you handle credit, the elements that affect your credit score stay the same, such as:

How the Borrower Handles Debt

All credit information agencies assign credit scores to borrowers based on how they have handled debt in the past. Your credit history, i.e. your track record of timely payments, loan applications, etc., gives credit information agencies an idea about how you handle debt. The credit history accounts for 35% of your credit score.

Credit Exposure

A credit utilisation ratio is the ratio of credit you have used against the total credit available to you. Maintaining a good CIBIL score requires you to keep a credit utilisation ratio of 30% or less. You should aim to clear the entire EMI amount rather than just paying the minimum due, as partial payments can negatively impact your credit rating.

Other Factors

Apart from the factors mentioned above, there are some other factors too that affect CIBIL score calculations. For instance, while calculating CIBIL scores, credit information agencies also look at the hard enquiries reported. Every time you apply for a loan, your credit score is evaluated. These enquiries are known as hard enquiries. Too many hard enquiries can hamper your credit rating. This is why you should apply for a loan only when absolutely necessary.

Similarly, credit rating agencies also look at what percentage of your income is going towards covering the debt. This is known as debt-to-income ratio and for a good CIBIL score, you should keep your debt-to-income ratio under 40%. The length of the credit history is another factor that affects your CIBIL score. The longer your credit history, the better your CIBIL score.

The CIBIL score is a key element that defines your ability to borrow funds as well as the terms and conditions on which you can secure these funds. Building a good CIBIL score takes time. A good CIBIL score is also important as it helps you avail of credit on beneficial terms and conditions, such as a low interest rate and longer repayment tenor. A bad CIBIL score, on the other hand, can make it difficult for you to get approved for credit. The good thing is that the CIBIL score is not absolute. You can improve your CIBIL score by practising healthy financial habits.