Thursday, 28 July 2016

What are the pros and cons of CIBIL score calculation

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.

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