How is Your CIBIL Score Calculated and What Affects It?

TransUnion CIBIL also calculates and issues the CIBIL score by using its algorithm. There is no specific mathematical formula to calculate credit scores and it varies from bureau to bureau. Credit score, also commonly known as CIBIL score, is calculated based on your past credit behaviour and is considered as the most important component of your credit report.

A good credit score doesn’t imply that your loan or credit card application will be surely accepted. Lenders shall also consider several key factors before loan or credit card approval.

Let us have a look at some of the important factors on which your CIBIL score calculation depends:

1. Credit Repayment History

Credit score is calculated and generated based on your credit history. The financial institutions share consumer credit information with the credit bureaus twice every month.

The credit bureau then collates all the information into your credit report and calculates your credit score. The credit bureau holds and maintains your month-on-month record of the last 7 years of your payment history. The credit report also contains the status of each account, whether it has been closed, settled, or written off, along with the total paid or overdue amount.

It also contains information related to your personal and account information, details of inquiries, Days Past Due (DPD), submitted collateral/security, if any, etc. Therefore, if you have ever missed, delayed, or defaulted on your loan EMIs or credit card bills, it shall reflect negatively on your credit report.

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2. Credit Utilisation Ratio (CUR)

The amount you spend on your credit card to the total available credit limit is considered as the Credit Utilisation Ratio. For calculating your credit utilization, Credit Information Companies (CICs) take the ratio of the credit amount utilized against your assigned credit limit.

Keeping a high credit utilization or maxing out your card frequently is seen negatively by credit bureaus. It depicts that the borrower is credit-dependent and may not be able to clear the debt in time which eventually marks a negative impression in the eyes of credit bureaus.

3. Credit Mix

Your CIBIL score also depends on the composition of your loan portfolio which may consist of both secured and unsecured credit. Secured loans constitute auto loans, home loans, and business loans which are backed by collateral or security whereas, personal loans and credit cards are unsecured loans, as they are not backed by any collateral or security.

Any default and delayed payment made for any kind of loan will negatively impact your CIBIL score. However, the higher weight of an unsecured loan shows that you may have a lower credit score if you are unable to repay them in time. Secured loans have a very positive impact on your credit score if repaid on time, as they are backed by security and lenders’ risk at a minimum.

4. Recent Credit Enquiries

Any credit enquiry done by a lender on your behalf is considered a hard enquiry. Multiple enquiries in short span shows your hunger for credit. It is taken negatively by bureaus and may impact your credit score significantly. It will be displayed under the Enquiry section in your CIBIL report. A higher number of credit card or loan applications in a shorter duration shall depict your credit-hungry behaviour and may result in loan rejection.

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CIBIL score is generally calculated based on several important factors by the credit bureau. They are:

An Ideal CIBIL Score

An ideal CIBIL Score for loans or credit is generally any score between 750 and 900. A good CIBIL score ensures a higher chance of your loan application getting approved.

No matter if you want to avail a personal loan, home loan, or car loan, any CIBIL score above 750 is considered favourable by most lenders. There are few lending institutions, such as NBFCs and Micro Finance Institution,s that may offer loans even if you have a low credit score but at higher interest rates and lower loan amounts.

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