Just as students are evaluated in an exam and given marks, a consumer is also rated on his money management skills. This score is a measure of the “creditworthiness” of a person and is extremely crucial. If you go to a bank and apply for a loan, the bank will see your credit score and judge if you can repay the loan. Because banks are at risk of losing money, they are cautious about choosing the right person to lend money to.
A credit score is a score assigned to an individual or small business for retail lending. The scoring methods vary across countries. In India, Credit Information Bureau India Ltd (CIBIL) provides a credit score, popularly known as CIBIL Score. It ranges from 300–900, with 300 being a weak score and 900 an excellent score. This score is an ordinal number rating. It specifies that the higher score is better but will not explain the difference between the two scores.
Five factors affect your score. Let’s take the first and essential factor, Payment History. As the name suggests, it is the history and quality of your loan payments. Missing out on even a single EMI will affect your score negatively.
The second is Debt Burden which assesses how many loans you have taken at the moment. If you have a home loan, a car loan and an EMI on the phone and Laptop, it will increase your credit risk. Chances of defaulting or missing payments are more, threatening a downgrade in your score.
The third factor is your Credit History. If you have an old account and have been making payments for a while, it is positive. New accounts with no credit history will be a negative factor.
The fourth factor that plays a key role is the Types of Credit used. Taking different types of loans over the years is a good thing, provided you have made all the payments timely. However, having all kinds of loans at the same time contains credit risk, as discussed earlier.
The last and final factor is Recent Searches. Now there are two types of searches. The first involves you checking your own CIBIL score. This check does not affect your creditworthiness. The second is when a bank will inspect your score whenever you apply for a loan. If there are many bank searches, the chances of your score downgrade are high. The reasoning behind the potential downgrade is that the searches indicate that you have approached multiple banks, and you may be in dire need of credit.
Always remember — you are not evaluated based on your gender, race, colour, origin, marital status or occupation in your CIBIL score. The only thing that matter is your behaviour as a borrower. Therefore to improve your CIBIL score, you have to make timely payments on your debt, spend less via credit cards and refrain from piling on EMIs. Good luck!
Concept: Shivangi Bhatia
Editor: Minakshi Todi