Your CIBIL
score is a mirror to your credit health. For, the credit score calculation by
CIBIL is totally based on history of your loans and repayments. The high score
indicates high credit worthiness while the low score manifests low worthiness
to pay back the loan.
The Maths
behind CIBIL score calculation is primarily based on 5 factors:
1.
Repayment
of loans: This single factor accounts for 35 % of credit score points. When you
pay your utility bills, loan EMIs, credit card balance and other outstanding
dues on time consistently month on month, it creates a very positive credit
history. ‘No late payment’ appears in your credit report. It makes you credit
worthy for future lenders.
2.
Credit
utilization: Besides the repayment discipline, you also need to show that you
are not credit hungry. It is important to not exhaust whole of your credit
limit every month. When you use less than 50 % of credit facility available on
your card you appear financially stable and this adds up to 30% points to
score. Ideally you should use 20 %-30% of the limit. The best practice is to
get rid of even the lowest of the credit balance every month before the due
date.
3.
Mix of
loans: The right mix of secured and unsecured loans is another factor that
helps CIBIL gauge your credit score. If you have more unsecured loans and cards
you are more risky to lend credit and this affects your score by 10 percent.
4.
Age of
loans: The age of loans affects the score by 15 percent. For example, if you
have availed education loan, car loan and personal loan, all in the last few
months you tend to appear short of cash. Your loan to income ratio would show
that you cannot re-pay more credit and thus the credit score will be low too.
5.
Enquiries:
Too many bank queries in a short span also show that you have big credit
appetite. So you should not make credit enquires to various channels in the
same time. This accounts for 10 per cent of score.
The Pros
of CIBIL Score Calculation
1.
The CIBIL
score clearly reports about an individual’s credit creditworthiness. So, both the
banks as well as customers gain with this knowledge. Based on the score bank
gets to know about your repayment capabilities and you know about credit
availability. A person with low score can either look for loans for bad credit score or work to improve the history before
applying for new loan. Thus the score calculation basically brings transparency
between the lender and the borrower.
2.
When you
have a good score, you get potential power to negotiate and can easily rope in low interest personal loans, auto loans
and credit cards. You can also vie for better card deals and loan offers.
3.
With
high score, banks are confident about your repayment capabilities. So credit
score calculation also leads to faster loan sanctions and saves time and effort
of both the parties.
4.
As you
tend to pay your loan and card balance on time to boost your score, you
basically start practicing good financial discipline. This habit helps you
build very good score in the long run and keeps financial troubles away in the
future as well. With good score, credit is always available to you at your
doorstep.
The Cons
of credit score calculation
1.
To err
is human, and error in the CIBIL score calculation is the only cons to the
consumer. As every individual is too dependent on the score for approval of
loan or credit card application, a single dispute or fault can hamper their
credit prospects for future.
2.
It takes
a long time to build the score and even longer to mend it. There is a provision
of raising a dispute with CIBIL for any kind of technical error, misreporting
or faulty information on your report. But it takes at least 15-30 days to get
the correction done.
3.
Another
drawback of CIBIL score calculation is when your score purges because of a
third party default whom you signed as guarantor to. Herein,
without being at fault you suffer low credit availability because of low score.
4.
With
availability of credit report online, any fraudster can claim your report and
enjoy credit on your name stealing your credit details. So it becomes all the
more important to keep your confident documents safe from other people.
All in
all credit score calculation, is a vital tool to access your credit power.
However you need to be cautious to not let anyone ploy this tool against you.