Credit scores are a reflection of your financial health. All the major banks in India take a good look at applicants’ financial history before approving of any loan. Borrowers are expected to meet a minimum credit score for loans in India. The best way to ensure a good CIBIL score range in India is to educate oneself about a few things. This article will help you to understand the importance of a good credit score, how you can maintain good credit and good practices to earn a decent CIBIL score to be eligible for loans in India.
What is Credit Score or CIBIL Score?
A CIBIL score is a three-digit number that reflects your creditworthiness to banks and financial institutions. A major factor that affects an individual’s credit score is their credit history. If you own a credit card or have borrowed a bank loan in the past, your CIBIL score exists. There are several ways of checking your score and report. Certain websites charge a small fee for it while some provide it for free.
What is a good credit score range in India?
Credit Information Bureau of India Ltd. (CIBIL), a semi-government entity, generates and maintains all credit reports and scores, hence the name CIBIL score. CIBIL has prescribed the following credit score ranges for individual borrowers.
Score Range | Category | Description |
300 – 549 | Poor | Indicates significant credit issues; difficult to obtain loans. |
550 – 649 | Fair | May face challenges in securing loans; higher interest rates likely. |
650 – 699 | Good | Positive credit behavior; loans may be approved but with less favorable terms. |
700 – 749 | Good | Generally eligible for loans with reasonable terms and interest rates. |
750 – 799 | Very Good | Strong credit profile; likely to receive competitive loan offers. |
800 – 900 | Excellent | Exceptional credit history best terms and conditions for loans and credit cards |
Banks consider individuals with high/good CIBIL scores to be low-risk borrowers. Hence, it is comparatively easier for them to get a bank loan. To secure a low-interest loan , 700 and above is considered to be a good credit score range in India. Low CIBIL score loans are also available; however, they are lent by private lenders at high interest rates. The importance of CIBIL score in the loan application process cannot be emphasized enough.
Why is CIBIL score important? What affects CIBIL score?
CIBIL score is part of a bank’s risk assessment process where individual borrowers are assessed based on their loan history. Before sanctioning or disbursing a loan, banks must conduct a mandatory check on the applicant’s credit/loan history. CIBIL score and CIBIL report has consolidated information on this, which helps them understand and assess the financial risk in one go without having to go through numerous documents.
The following factors are considered for an individual’s CIBIL score.
Credit history: If the applicant has borrowed a loan in the past, banks check whether the bills were paid on time, whether any payment delays happened and the time gap between payments. This indicates whether the applicant is handling their credit accounts responsibly. Any delayed repayment of credit cards or instant loans will bring your CIBIL score down.
Multiple credit accounts: While owning multiple credit cards can reap benefits, it is essential to ensure that credit card bills are repaid. Delays lead to increased interest charges by credit card companies and incomplete payment of credit card bills incurs a dip in your credit score.
Maxing out your credit card spending limit: Companies set a spending limit on credit cards depending on an individual’s monthly income. Be careful to not exceed this limit as multiple instances of maxing your credit limit can impact your CIBIL score negatively.
Frequency of loans: Individuals who borrow multiple loans within a short time period will have low CIBIL score. Ensure that you do not have more than one active loan at a time. This will ensure your score remains withing the good credit score range prescribed by CIBIL.
How is CIBIL Score Calculated?
The CIBIL considers several aspects of your financial portfolio while calculating your CIBIL score. They allow certain percentages of these factors to give you a fair and accurate score. Here are some of the parameters that are considered during CIBIL score calculation.
- Payment History (30%): Timely payments on loans and credit cards are crucial for maintaining a positive score.
- Credit Utilization (25%): This refers to the ratio of current debt to available credit. Keeping this ratio below 30% is generally recommended.
- Length of Credit History (25%): A longer credit history can positively impact your score, as it provides lenders with more data on your borrowing behavior.
- Credit Mix (10%): A diverse mix of credit types (e.g., personal loans, mortgages) can enhance your score.
- Recent Inquiries (10%): Multiple inquiries for new credit within a short period can negatively affect your score.
Expert tips to maintain a good credit score range?
It is estimated that 30% to 40% of loan applications are rejected due to low CIBIL scores in India. If you are looking to borrow a loan of any nature, it is important to educate yourself on maintaining a good CIBIL score range in India. Here are a few ways to ensure that your CIBIL score falls within the prescribed range.
Regular payment of credit card bills: This concept is simple, pay your credit card bills regularly within a date you set. Most banks allow credit card holders to set their billing cycles. You may calculate your billing cycle and set a date close to your salary day. You can visit your bank branch or set an auto-payment schedule through their mobile application.
Monitor your credit utilization: Loans are a good way to tackle huge expenses like buying a car or a house. However, borrow only what you can afford. While loans and credit cards allow you to spend without denting your pocket, keep an eye on how much you spend. Remember that you have borrowed money to fulfil your financial requirements and constantly monitor your credit spending. Signing up for monthly e-statements and carefully studying them will give you a glimpse of your spending habits and cut short when required.
Limit new credit applications: If you have multiple credit cards, it is a good practice to avoid applying for new ones. Several hard enquiries on your financial profile can impact your credit score negatively.
Maintain a healthy debt-to-income ratio: Debt-to-income ratio indicates the relationship between your debts and your monthly income. If your debts are higher than your income, it can lead to low CIBIL score. To secure a loan, applicants must have a steady income. If your debt-to-income ratio is disproportionate, your chances of loan rejection are more. Hence, you must keep a track of this parameter while managing your finances.
Common Myths About CIBIL Score in India
Although CIBIL score is an indispensable part of the loan process, it is not the only factor that affects your chances of securing a loan in India. Let’s take a look at some of the most common myths surrounding a good CIBIL score range in India and learn whether they actually make sense.
Myth1: Checking your CIBIL score can reduce it
This is a myth. Checking your CIBIL score will not have any negative impact on your score. In fact, it is recommended that you check your score often to understand whether there are discrepancies in your report or financial portfolio.
Myth 2: CIBIL score is the only factor banks consider when processing loan applications
No. While it is an important aspect of the loan process, CIBIL score is not the only deciding factor. Banks also consider your income tax information, monthly salary, value of your collateral, financial capacity along with CIBIL score while processing your loan application.
Myth 3: A Low Credit Score Lasts forever
A low credit score indicates an individual’s reliability as a borrower. However, one can improve their credit score through responsible financial behaviour. Repaying old debts, improving their debt-to-income ratio are some of the ways to improve a low credit score.
Myth 4: A low income impacts your credit score
Your monthly income does not impact your credit score. CIBIL scores are calculated on the basis of your credit history, active loans, length of credit history and the number of credit accounts you have.
In order to have a credit score, you must possess a credit card or loan account to your name. The above information will help you streamline your financial future and aid better planning.
Conclusion
Credit cards offer a myriad of benefits. The trick is to understand how they work and utilise them accordingly. Monitoring your credit transactions can help you to take measures that can lead to a good credit score in India. It is also important to understand that not all myths surrounding credit scores are true. With responsible financial planning and knowing the ways to improve and maintain credit scores within the good range, you can apply for loans, thus realising your financial dreams.