Borrowers often encounter the terms credit score and credit report when dealing with financial institutions. You may already know that these are important considerations in availing loans. However, you might be confused whether you need CIBIL vs credit score as they are interchangeably used in many loan documents. This article will give you a better understanding of both these terms and clear your doubts when applying for credit.
What is a credit score?
Various credit bureaus in India keep a constant track on the financial records of all individuals and companies in the country. These agencies analyse and evaluate details such as credit card usage and loans taken. They sum up their findings about individuals and organisations in a three-digit number called the credit score. This score indicates your creditworthiness to lenders and ranges from 300-900. A score of 750 or more is considered ideal for borrowers.
Credit score may vary according to agencies
Every credit agency has its own way of assessing the credit scores of individuals and companies based on the information they are provided by financial institutions. Hence, your credit score will slightly vary from one agency to another.
Also Read: Step By Step Guide For Checking Your Credit Score What is a CIBIL score?
TransUnion CIBIL Limited is one of India’s premier credit rating agencies, approved by the Reserve Bank of India (RBI). CIBIL, also known as Credit Information Bureau (India) Ltd, collects and stores data about the credit behaviour of different individuals and commercial entities in India, and it uses this data to generate their credit reports and credit scores. The
credit score given by CIBIL to individuals or organisations is known as the CIBIL score.
A CIBIL score is a glimpse of your credit history that includes the number of credit accounts you hold, your total debt, credit card bills, credit utilisation ratio, and repayment history. From this description, it is clear that the difference between credit score and CIBIL score lies only in the name of the specific credit rating agency giving the credit score.
What is CIBIL report?
A CIBIL report, alternatively known as a credit information report, is prepared by CIBIL through the credit data gathered from various financial institutions and lending organisations. It is a current record of all your credit and loan-related information, including your credit score. Apart from financial details, a credit report also contains personal data like your name, PAN card number, address, gender, etc.
How CIBIL score is calculated
Here are the various factors from which your CIBIL score is calculated by TransUnion CIBIL Limited:
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Past repayment history
If you have instances of default or late payments in the past, it will negatively impact your score. Late repayment of credit availed has the highest effect when calculating your credit score. If you have been sincerely paying your credit bills, loans, or EMIs on time, it shows that you are a responsible borrower and your chances of defaulting on the loan are low. As a result, CIBIL will assign you a high credit score.
On the other hand, missing or delaying your EMIs will bring down your credit score by a considerable amount.
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The way you utilize credit
Heavy use of credit cards implies that an individual is too dependent on credit, and any emergency may lead them to defaulting on their EMIs. The difference between your overall outstanding balance and your total credit limit defines your credit usage ratio. Usually, lending organisations prefer a credit usage ratio of 30% to give loans to individuals. Financial experts also advise that people should utilise only 30 to 40 per cent of their credit limit to attain a high credit score.
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Number of hard inquiries
If you apply to get credit from financial institutions, they will conduct a hard inquiry to check your credit report. Too many hard inquiries in your name make you appear desperate and needy. Lenders usually hesitate to approve the loan applications of such individuals. However, there is no harm in checking your credit score regularly, which is viewed as a soft enquiry and does not impact your credit score.
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Total loans already applied and approved
Credit bureaus have all the information about the number of loans you have applied for and how many you have availed. If any loan was not approved in the past, it will significantly impact your score. Maintaining a balance in this aspect will help increase your CIBIL score.
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Total accounts of secured and unsecured credits
An ideal credit history should have a good mix of secured and unsecured debt. Even though it has a minor role to play in your overall credit score, you must consider this aspect when availing loans. The expert suggestion is that you should not borrow a large amount from just one type of credit as it could affect your CIBIL score.
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The duration of your credit history
If you have been consistently paying your debts on time, it tells lenders that you are worthy of being granted new loans. A long credit history shows that you are an experienced borrower, and it is likely that you will repay your debt on time.
Also Read: Can A Personal Loan Help You Improve Your Credit Score?
To Conclude
The above comparison of CIBIL vs credit score should have cleared your doubts regarding their differences and use cases. Essentially, these scores differ only in the credit rating agencies that issue them. While the
TransUnion CIBIL score is provided only by CIBIL TransUnion Limited, other credit bureaus in India also give their own credit scores for both individuals and organisations. Both these scores help lenders determine a borrower’s creditworthiness. A higher score will helps you easily avail loans at competitive interest rates.
