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How is your CIBIL score calculated?
Your CIBIL score, often referred to as a credit score, plays a crucial role in determining your creditworthiness. Whether you're applying for a credit card or a personal loan, financial institutions and banks check this three-digit number to assess your credit risk. But have you ever wondered how this score is calculated? Let's understand the components of CIBIL score calculation.
Understanding the Components:
Payment History (35%):
The most significant factor influencing your CIBIL score is your payment history. Timely payment of credit card bills, loan EMIs, and other credit obligations positively impact your score, while late payments, defaults, or bankruptcies can have adverse effects.
Credit Utilisation (30%):
Credit utilization indicates how much of your total credit limit have you used. Maintaining a low credit utilisation ratio is crucial, as it signals responsible credit management. High credit utilisation can indicate financial strain and negatively impact your score.
Length of Credit History (15%):
The duration for which you have held credit accounts contributes to your score. A longer credit history is generally viewed favorably, as it provides a more comprehensive picture of your financial behavior.
Types of Credit in Use (10%):
The variety of credit accounts you hold influences your score. A mix of credit types, such as credit cards and instalment loans, can have a positive impact. However, too many credit inquiries or opening multiple accounts in a short span may raise concerns.
New Credit (10%):
Opening new credit accounts and recent credit inquiries are factored into your score. Too many credit inquiries in just a short span of time can be perceived as a sign of financial distress and may negatively affect your CIBIL score.
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Steps to Improve Your CIBIL Score:
Pay Bills on Time:
Ensure timely payments for all your credit obligations to maintain a positive payment history.
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Manage Credit Utilization:
Aim to keep your credit card balances below 30% of the entire credit limit to maintain a healthy credit utilisation ratio.
Maintain a Mix of Credit Types:
Diversify your credit portfolio by holding a mix of credit types, demonstrating your ability to manage different financial responsibilities.
Avoid Frequent Credit Inquiries:
Limit the number of times you apply for new credit, as multiple inquiries within a short timeframe can impact your CIBIL score.
By focusing on responsible credit management, timely payments, and maintaining a diverse credit portfolio, you can work towards improving and maintaining a good credit score. Regularly checking your credit report for accuracy and addressing any discrepancies promptly is also a crucial aspect of managing your creditworthiness. Remember, a good CIBIL score opens doors to better financial opportunities and terms.
