CIBIL Score Calculation

CIBIL score calculation depends on your past credit behaviour and creditworthiness. The four major Credit Bureaus or Credit Information Companies (CICs) of India calculate and generate the credit scores of individuals by using their own and different statistical algorithm. Likewise, TransUnion CIBIL also calculates and manages the CIBIL score by their unique algorithm. There is no specific mathematical formula to calculate credit score and it varies from bureau to bureau. Credit score, also commonly known as CIBIL score is calculated on the basis of your credit history and is considered as the most important component of your credit report.

Factors on which CIBIL Score Calculation Depends

A good credit score doesn’t imply that your loan application will be accepted automatically. The lender will also consider a number of factors before disbursing the loan to you. Let us have a look at some of the most important factors on which CIBIL score calculation depends:

Credit History

Credit score is calculated based on your credit history. It has the highest weightage of 30% in your CIBIL score calculation. The banks and the financial institutions send personal as well as credit related information to the credit bureaus. The credit bureau then collates all the information into your credit report and calculate credit score. The credit bureau has a month-on-month record of the latest 3 years of your payments towards your bills and EMIs.

The credit report will also have the status for each account whether it has been settled, written off and the total outstanding amount. It also carries about your days past dues details that is the details of the payments you have made. So, if you have ever defaulted or have delayed paying your equated monthly installment (EMI) on any of your loan or made late payment on your credit card, it will affect your credit score negatively.

Suggested Read: How Credit Card Impacts your Credit Score?

Credit Utilization Ratio (CUR)

The amount you spend to the credit limit available to you on a credit card is considered the credit utilisation ratio. It has a weightage of 30% in calculating your credit score.  For calculating your credit utilization, take the ratio of credit amount utilised to your credit limit.

Keeping a high credit utilization or maxing out your card frequently is seen negatively by the credit bureaus. It shows that the person’s credit burden is rising over time and gives a negative impression to the credit bureau.

Credit Mix and Duration

Your CIBIL score will also depend on the composition of your loan portfolio that is how much secured loans and unsecured loans do you own?  It has a weightage of 25% in your CIBIL score calculation.

Secured loans are auto loans and home loans which have collateral while personal loan and credit card loans are unsecured loans as they don’t not backed by any security. Any default and delayed payment made for any kind of loan will impact your CIBIL score. However, higher weight of unsecured loan shows that lower will be your score compared to a person who has never taken an unsecured loan despite the fact both of you have made timely repayments. Secured loans have a very positive impact on your credit score if repaid on time.

Additional factors

There are other factors such as how many credit applications you have made in the recent past that account for the remaining 20% in CIBIL score calculation. It will be displayed under the Enquiry section in your credit report. Higher number of credit card or loan applications gives a negative impression to the credit bureau as it portrays the borrower as a credit hungry person.

Related Post: What is a CIBIL score, and what factors affect my CIBIL score?

Factors that affect CIBIL score

CIBIL Score is generally calculated on the basis of a number of important factors by the credit bureau. They are:

Repayment History:  In case of late payments or defaulting your equated monthly installment (EMI), it will negatively impact your score. It is considered as one of the most important factors while calculating your CIBIL Score.

Credit Utilization: High use of credit regularly indicates that the applicant depends too much on credit and any unwanted incident can push him towards defaulting on the loan. A low credit utilization ratio of below 30% is preferred by lenders.

Multiple Enquiries – Multiple enquiries present you as desperate and credit hungry. Lenders are reserved towards approving credit applications of such applicants. Thus it is recommended to make a hard enquiry only when you are sure of taking a loan. However, checking your credit score regularly comes under soft enquiries and have no impact on your CIBIL score.

Number of loans Availed and Applied: The Credit Bureau will keep a track of how many loans you applied in the past and out of which how many loans actually got approved. In case, many loans were rejected, it can negatively impact your score.

Credit Mix: You should have an ideal mix of secured and unsecured credits to build a strong credit history. But this factor has a low weightage while calculating your score.

Also Know: Where to check your CIBIL score online for free

What is an Ideal CIBIL Score you should maintain? 

An ideal CIBIL Score for loans or credit is generally any score between 700 and 900. A good CIBIL score ensures a higher chance of your loan application getting approved. No matter if you want to avail a personal loan, home loan or a car loan, any CIBIL score above 750 is considered favourable by most of the lenders.

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