Wednesday, 27 April 2016

How is your CIBIL rating calculated?

In answer to a standardized, transparent and convenient way to calibrate potential borrowers, credit bureaus or credit rating agencies give out a credit score. The credit rating agencies in India are CIBIL, Equifax, Experian and Crif Highmark. While some financers prefer one to the other or a combination of more than one score, it is the CIBIL Transunion score that is most widely recognized and accepted to filter out the credit unworthy borrowers. Therefore, it makes good sense to know how it works and how the rating is calculated, so as to stay on track and not be taken by surprise when you see the report card.

You would need to create a CIBIL consumer login to gain access to your report and rating. The website is user-friendly and answers most questions about anything and everything to do with the anatomy of the credit report, the parameters used to arrive at the rating, as well as how to correct a CIBIL report.
There are 2 versions of the Transunion score given by CIBIL. The first version is a range from 300 – 900. The closer you are to 900, the better your chances of having your loan approved. CIBIL V 2.0 is a risk index score that was formulated to take into account those individuals who have a credit history less than 6 months old. It ranges from 1 – 5. The higher the index, the lesser is the risk of lending to that person. Let’s now see the factors taken into consideration for your CIBILscore calculation, or your Transunion score V 1.0.
The score captures details on every movement associated with your credit history. There is an “accounts” and “enquiries” section that records history related to each line of credit you have ever availed of and the number of times your score has been accessed each time you made a loan application to a bank or a lending institution. Basically, there are four main components to the score:
1.       Your payment history or past performance: Imagine your score as a pie-chart. 30% of this pie is based on how you fared in your debt obligations for the past 2 years. This section looks at how timely you have been with your payments on credit cards or loans – even small personal loans. If you’ve ignored timely EMI payment or not closed a certain loan, because the amount to pay off was too petty, unfortunately, such decisions will be reflected in your score.
2.       Credit Mix and Duration: The next slice of the pie constitutes 25% of the score. It takes into account the ratio of secured and unsecured credit. If you have availed only of private personal loans and credit cards till date, this part of the score may be lesser – and that’s because these are considered unsecured loans. Education, car, home loans are your typical secured loans. Why this forms such a big chunk of your pie is because lenders are looking to see how much debt you owe to the market. While credit cards and personal loans are easy finance, a higher number of these with a high utilization would mean more payments and high interest rates. This puts you at a disadvantage because it indicates that you are already under pressure to meet debt obligations. A good mix of both would improve credit score.
3.       Credit Exposure: The amount of credit extended to you is also an indication of your credit worthiness. Too many applications for loans or credit given over a short period of time over the past few months will affect your score negatively. It would indicated that you are under increased debt burden and therefore lenders would not be as willing to extend further money to you. This accounts for 25% of the score.
4.       High utilization: It always feels nice to have a high credit limit on your credit card. It is a kind of security that you can fall back on in times of urgent situations. However, if you are going to max your credit limit frequently, and not maintain zero balance on your credit card, it indicates that you are reaching for money beyond your means to meet your needs. That, unfortunately, reflects poor money management. Lenders would be cautious while reviewing your loan application. This, and your recent borrowing and repayment behaviour, accounts for the rest of the score, which is 20%.
Now, that you have a clearer picture of the kind of information that is used to determine your score, you can request your score, if you already haven’t done so, and stick to a good plan of making timely payments and utilizing credit.

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