What Is the CIBIL Score and Why Is It Important?

These days, most buyers rely on credit to fulfil their desires and necessities. When people buy a home, they avail of a home loan. When they buy a car, they seek external assistance in the form of car loans. When they shop, they use credit cards. 

The availability of credit, however, depends on a borrower's credit score. A credit score is a three-digit number that signifies a borrower's repayment capacity as well as creditworthiness. It is important because it tells a lender whether or not the borrower will repay the loan on time and the risk involved for them in lending money to the borrower. 

Four credit information agencies are recognized and authorized by the Reserve Bank of India (RBI) to assign credit scores to borrowers. These agencies collect information that signifies a borrower's attitude towards credit, such as their past credit history, credit utilization ratio and debt-to-income ratio, hard enquiries under their names, cases of loan default or tax liens against them, etc. Based on this information, these agencies assign a credit score to each borrower. 

The credit score ranges between 300 and 900, with 300 being the worst credit score one can have and 900 being the highest. If your credit score lies between 750 and 900, you have a good credit score. Such a credit score ensures quick approval and lucrative loan and credit deals. If your credit score lies between 700 and 750, you fall within the good credit score category. Such a credit score fetches approval from lenders. However, since lenders see some risk in lending money, they charge a higher rate of interest from borrowers who fall under this category. 

If your credit score is between 650 and 700, it will be difficult for you to get approved for a loan. Your lender may ask you to add a co-borrower or a guarantor to enhance your loan eligibility. Finally, if your credit score is below 650, it is very unlikely that you will be able to get a loan, even if you add a co-borrower with an excellent credit score. In this case, your only option would be to first improve your credit score and then apply for a loan. The question is how do you improve your credit score? Here are a few tips that will help. 

• Make it a habit to pay all your credit card bills and EMIs on time. Credit history is an important part of your credit score and therefore, one must make it a point to maintain a clean credit history. 
• Never exhaust your credit card's limit. Ideally, borrowers should maintain a credit utilization ratio of 30% or less. Anything above this indicates an irresponsible attitude towards credit. 
• Do not apply for credit until and unless you absolutely need it. Every time you apply for credit, your lender enquiries about you. Each lender enquiry gets registered as a hard enquiry. Too many hard enquiries ruin a borrower's credit rating and therefore, borrowers trying to improve credit scores must apply for credit only when they need it. 

Lastly, borrowers must also check credit report from time to time for errors. It is not uncommon for errors to creep into credit reports and ruin a borrower's credit rating. Therefore, all borrowers must check their credit reports for errors and if they see any, they must report them immediately as rectifications take time.