CIBIL Score is the 3-digit credit score between 300 and 900 calculated by TransUnion CIBIL, India’s oldest CIC (Credit Information Company) or credit bureau. As a result of its popularity, CIBIL score is often used interchangeably with the broader term credit score even though it is only one among 4 different scoring models currently available in India.
What exactly is a low CIBIL Score?
According to TransUnion CIBIL, a majority of successful loan and credit card applicants have a CIBIL score of 750 or higher. Thus in general practice a CIBIL score of 750 and higher is considered to be a high score. The TransUnion CIBIL data also shows that it is less likely that a loan/credit card application will be approved in case the applicant’s CIBIL score is less than 650. Hence for all intents and purposes, a score lower than 650 calculated by CIBIL is considered to be a low score. However one must keep in mind that even with a low score you can get approved for a new loan or credit card, but, the chances of this happening are lower and typically lenders will charge you a higher interest rate even if your loan application is approved.
Top 5 Reasons for a Low CIBIL Score
The scoring model used by TransUnion CIBIL is protected by law hence exact details are unknown. That said, experts have over the years figured out most of the factors that influence an individual’s credit score and the following are the top 5 reasons for an individual to have a low CIBIL score:
- Poor Payment Track Record: Your payment history is one of the key factors that affects your CIBIL score. If you have repeatedly delayed or missed your EMI/credit card payments in the past, your score will decrease. But it is not just missed/delayed payments, having a default in your credit report can have an even worse impact on your credit score. Having even a single default in your credit history can significantly decrease your score and keep it low for an extended period of time.
- Having a High Credit Utilization Ratio: Credit Utilization Ratio is calculated by dividing the total credit utilised by the total available credit limit across all credit card and loan accounts (usually on a monthly basis). A high credit utilization ratio (such as higher than 30%) indicates a higher dependence on credit and a potentially high repayment burden. Thus individuals with higher credit utilisation are considered to be at higher risk of default which negatively impacts the CIBIL score.
- Submitting Multiple Applications for New Credit Simultaneously: Submitting multiple applications for new loans and credit cards with several lenders within a short time results in an increase in the number of hard enquiries. All of these hard enquiries get recorded on your CIBIL credit report and show you to be a “credit hungry” borrower who is potentially at a higher risk of default. As a result, your CIBIL score is likely to decrease. Additionally, if you do get approved for multiple loans, your debt burden will increase which may adversely affect your ability to repay the outstanding debt and result in a decline of your CIBIL score.
- High Exposure to Unsecured Credit: Having too much outstanding unsecured debt through credit cards and personal loans can adversely affect your CIBIL score as it is often interpreted as a sign of mismanagement of personal finances. You should therefore ideally maintain a balance between secured credit (such as home loan, car loan, etc.) and unsecured credit (credit card, personal loan, etc.) to maintain a high score.
- Errors in your CIBIL Report: Errors in your CIBIL Report such as an incorrect mention of default in repayments, errors in active loans/credit cards reported, etc. may adversely affect your CIBIL Score. These may be administrative recording errors or may indicate fraudulent usage such as identity theft. Also, incorrect or delayed reporting of loan status by banks may show up as faulty information on your CIBIL Report and negatively impact your score. Ideally you should regularly check your credit report and raise a CIBIL dispute to rectify errors, if any at the earliest.
How to Improve your CIBIL Score?
A high CIBIL score (such as 750 or higher) indicates good management of finances in the past and better repayment capacity. It helps you avail additional credit more easily and on better terms. In case you have poor credit history and a low CIBIL score (such as 650 or lower), it can certainly be remedied over time by following the simple tips and practices given below:
- Pay Credit Card Dues and loan EMIs on time: Paying your EMIs and credit card dues in full and on time has a positive impact on your CIBIL score as it indicates responsible credit behaviour. Just keep doing this over time and you will be able to improve your score and also maintain a high score.
- Maintain a Low Credit Utilization Ratio: Credit utilization ratio indicates the extent of your dependence on credit. Maintaining a low credit utilization ratio (usually 30% or lower of your total available credit limit) hints at a lower dependence on credit and thus, a lower burden of repayments. This indicates responsible credit behaviour and has a positive impact on your CIBIL score.
- Maintain a Balance between secured and unsecured credit: You should ideally maintain a balanced mix of secured and unsecured credit. It indicates prudence in accessing and using credit instruments and this has a positive impact on your score.
- Review and Monitor your Credit Report Frequently: Monitor your credit report frequently for administrative errors and possible fraudulent usage. These errors, if reported using the CIBIL Dispute resolution mechanism and rectified in a timely manner can help improve your CIBIL score.
- Be Judicious When you Apply for New Credit: Avoid applying for new credit unless you actually need it. Keeping the number of new applications in check will prevent multiple hard enquiries appearing on your report and help you maintain a high score.
- Settle Your Debts only as a last resort: Avoid settling your debts and instead try and pay off outstanding debts in full. Consider settlement only as a last resort, this is because, even though a settlement will reduce your debt burden, it indicates an inability to handle your finances judiciously which will negatively impact your CIBIL score.
Q1. What is the difference between credit score and CIBIL score?
Credit score is a broad term for the 3-digit numeric summary (between 300 and 900) of the information found in an individual’s credit report and may be generated by any of the four Credit Information Companies in India – TransUnion CIBIL, Experian, Equifax or CRIF Highmark. CIBIL score, on the other hand is the specific credit score calculated by TransUnion CIBIL, India’s first and most well-known credit bureau.
Q2. Is my CIBIL score the only determinant of my ability to secure new credit?
CIBIL score or credit score is one of the first things that lenders consider when lending money to an applicant. However it is not the only factor that determines your ability to secure new credit. Your age, income, employment, loan amount, etc. are some of the other key factors that lender’s look at when evaluating loan applications.
Q3. If I have a low CIBIL score, will my credit score generated by any other credit bureau also be low?
All banks and NBFCs report the same information to all four credit bureaus. Since the same factors such as your repayment history, credit mix, credit utilization ratio, etc. are taken into consideration by all bureaus to calculate the credit score, an individual is likely to have a similar low or high credit score with each of the four credit bureaus. However, there may be a slight variation in the 3 digit score assigned because each Credit Information Company has its own proprietary algorithm and the weightage given to each factor involved in calculating the credit score varies.
Q4. What is the difference between hard and soft enquiries? Can soft enquiries hurt my CIBIL score?
Enquiries made by lenders when you apply for a new loan or credit card are known as hard enquiries. Soft enquiries refer to credit report checks made by individuals to review or monitor their own credit behaviour. Soft enquiries have no impact on the credit score no matter how frequently such soft enquiries are completed. On the other hand, too many hard enquiries can decrease your CIBIL score as they may indicate a higher dependence on credit and a higher burden of repayments in the future.