TransUnion CIBIL, previously known as Credit Information Bureau (India) Limited, founded in Mumbai, Maharashtra in August 2000 is the first Credit Information Company (CIC) in India. A CIC such as TransUnion CIBIL is also known as a Credit Bureau and is in the business of collecting and maintaining records detailing loan and credit card payments of individuals and non-individual entities such as a business.
The loan and card payment information of consumers is provided to TransUnion CIBIL by its member banks and other lenders on a monthly basis. Through extrapolation and other such techniques, CIBIL calculates the Credit Information Report (CIR) and Credit Score of a consumer. The credit score made available by CIBIL is known as CIBIL Score.
A CIBIL Score is a three digit figure which represents the financial identity of an individual or a business. It’s basically a metric of how probable an individual or a business is to meet his/her debt obligation and repaying his/her loan. It is this CIBIL Score which lenders and credit institutions check while evaluating a borrower’s loan application. CIBIL score ranges from 300 to 900. Any score above 750 is considered a good CIBIL score. Scores below 750 are usually considered low CIBIL score by lenders and credit grantors.
A CIBIL Score is important because if the borrower has a low CIBIL Score then the lender may out-rightly reject his/her application or may charge a much higher rate of interest due to the higher risk associated. However, if the CIBIL Score is high, the chances of the loan application getting approved are high and the interest rates on repayments are low. However, the decision of sanctioning a loan or granting a credit card totally depends on the lender.
Reasons for Low CIBIL Score
- Payment History: If you use a credit card and/or have taken a loan in your name and you pay the minimum amount or the interest repayment after the due date, then your CIBIL Score falls. Consumers who make late payments or default on their EMIs or dues will earn a bad credit and gain a negative impact on their CIBIL Score. Even if you default on your payment or dues once, the effect shall probably affect your CIBIL credit score. If you continue defaulting frequently, your CIBIL credit score shall certainly go down.
- Multiple Enquries for Credit: If you have applied for multiple loans simultaneously or requisitioned multiple credit cards at the same time, then your CIBIL score stands to be impacted as to any lender such a financial behaviour would look like a cause of concern. Multiple enquiries for credit cards and loans means that your debt burden is going to increase which logically means that your loan/dues repayment capacity has been reduced or is going to be reduced going forward.
- Credit Limit reached frequently: If the spends on your Credit Card frequently reach the credit limit, it will then lead to a constant high repayment burden and that accepting your loan application will negatively affect your repayment capability. Thus considering this factor, CIBIL may keep you in a lower CIBIL bracket so as to inform the lenders of your high credit utilization.
- Managing Credit Types: If you don’t have a good enough mix of secured and unsecured loans in your financial history then your CIBIL score is bound to be impacted as an unbalanced assortment of secured and unsecured loans is liable to give you bad credit history. Secured loans are the ones in which the borrower keeps an asset(s) of yours such as a car or property as collateral for the loan. This collateral is a secured debt owed to the creditor who gives the loan, i.e. if you are unable to repay the loan, your lender may seize your collateral asset to recover his/her loan amount. Thus, an unsecured loan is a loan where the creditor doesn’t demand the borrower’s collateral and grants him/her the loan based on his/her credit-worthiness. It is also called a Personal Loan or a Signature Loan. Examples of Secured Loans are Auto Loans and Home Loans while examples of unsecured loans are Personal Loans and Credit Cards.
So if you only have unsecured loans in your financial profile then your CIBIL score is deemed to be negatively affected as your debt liability at any given time stands to be high due to credit card and personal loan repayment debt. However, if you only stack up secured loans for your credit usage, then the credit bureaus such as CIBIL or Equifax may deduce that you have don’t have any asset free to keep as collateral for your new loan. Thus, it is pertinent to keep a healthy mix of secured and unsecured loans in your loan kitty so that your assets and financial independence speaks out to the CIC clearly.
Also you may note that CIBIL cannot delete or change your financial payment records as this info is provided to them by member banks and financial companies. Moreover, CIBIL has recently launched CIBIL Score 2.0 which is a revised version of the CIBIL Credit Score and reflects the current trends and alterations in consumer profile and credit data. Banks have begun the transition to the newer version. You may also note that a CIBIL 2.0 score is lower than the earlier version of the CIBIL Score. Currently, CIBIL has not made this 2.0 score available to the individual consumer.
Also a consumer may have a CIBIL Score which says “NA” or “NH”. This means one of the three below things:
- Consumer doesn’t have a credit history or doesn’t have enough of a credit history to be scored (consumer is new to the credit system)
- Consumer has all add-on credit cards and has no credit exposure
- Consumer doesn’t have any credit activity in the last couple of years
These types of scores may not negatively affect your loan application however some lenders’ are cautious to provide a loan to an applicant with no credit history.
How to Improve your CIBIL Score?
You can remedy your bad credit history and you can improve your low credit score by following the below steps:
- Keep your Credit within limits: Your creditor gives you a credit limit which is the maximum amount which can be loaned to you at any given time from a specific credit card. You should be prudent to not utilize your credit to its maximum limit frequently. This gives an impression to your creditor/CIBIL that you are frequently debt ridden. This in turn may result in a low CIBIL score. Alongside this, it is also important to not keep or apply for one too many credit cards as this may give an impression that you are debt-ridden. Be judicious while requesting new credit.
- Pay Dues on time: It is pertinent to pay your dues or at least your minimum dues on time to the lender. If you delay or default in paying your dues then it shall undoubtedly harmfully affect your credit history and consequently your CIBIL Score.
- Monitor your owned and co-owned accounts regularly: It is important to regularly monitor your co-signed, guaranteed or jointly held accounts too as you are partially responsible also if they miss a payment. You or the joint account holder might have missed the payment due to relocation, due to non-receipt of credit statement or due to a dispute with a lender. Whatever may be the case, negligence in keeping your credit history clear will lead to bad credit and will affect your ability to access credit through your co-signed, guaranteed or jointly held accounts.
- Maintain healthy credit: For avoiding a bad credit history and a low CIBIL score, it is important for you to have a well-balanced mix of secured and unsecured loans in your loan bouquet. Too many active loans are viewed negatively. Also, you should regularly review your Credit information Report (CIR) throughout the year to know which financial activity is pulling down your Credit Score.