How is Credit Score or CIBIL Score Calculated?
Loan takers that are Borrowers and Loan Givers that are Lending Bankers, everybody is talking about Low or Bad CIBIL Scores and no Loan, Working Capital Limit, Credit Card and even Bank Guarantee facility are sanctioned without checking your Credit Health through CIBIL Scores. But have you ever wondered as to “How is your CIBIL Score Calculated”? Through this article, Ashok Goyal, Retd Chief Manager of PNB, is going to unfold all the fundas and secrets of CIBIL Score Calculation for you. After explaining the intricate process of CIBIL Score calculation, which is still a well-guarded secret, I will take along my audiences to the Journey from CIBIL Score of minus 1 to CIBIL Score of 900.
Credit Score is calculated by different Credit Bureaus like CIBIL, Experian, Equifax, and CRIF High Mark by using their own developed computerized algorithm. Based on many factors influencing Credit History – a number between 300 to 900 is assigned. More the score is near to 900, it will make the Credit Institution more confident about borrowers repaying capacity and the repayment behavior of the borrowers and the better chance of getting the Loan or Credit Card approved. As TransUnion CIBIL is the oldest Credit Bureau in India with the largest database of consumers, the Banks rely on the Trans Union CIBIL Score more as compared to Credit Scores from other three Credit Bureaus. Trans Union CIBIL assigns two types of scores:
- TU CIBIL Score: Where the score is derived considering all loan accounts including Personal Unsecured Loans and Credit Card.
- PL Score: Where the score is derived considering only Personal Loan accounts and Credit Cards.
CIBIL Score of 750 and above is generally considered a Healthy Credit Score.
How is your CIBIL Score Calculated?
While every Credit Bureau or Credit Information Company applies their own developed computerized algorithm, which is highly complicated and does not involve any manual intervention, for calculating the Individual’s Credit Score but the underlying principles remain the same as these principles revolve around the repayment behavior of the Individual. However, CIBIL Score is calculated considering only your “Accounts” and “Enquiry” sections in your CIBIL Report. The following factors play a decisive role in assigning you the CIBIL Score, which can not be disputed in any court of law in India:
- Credit Utilization: How much credit is an Individual using?
- Defaults and Delinquencies: How many accounts are Past Due and What is their DPD value?
- Trade Attributes: Type of Credit? How old is the Credit History? Credit Mix – Secured and Unsecured Loans?
- Credit Enquiries: Number of Credit Enquiries in the CIBIL Report is not seen as a good feature and unnecessary inquiries by Credit Institutions lowers the Credit Scores substantially.
Here is a breakup of the various factors that impact the CIBIL Transunion Score:
- Past Performance: About 30% weightage is given to your Past Performance in repaying your existing of your Past Loans, Debts and Credit Cards. As everything is computerized, any mistake done by your Banker can lead to Bad Credit History despite your timely repayments. Individuals must keep a constant Vigil on their Credit Health. If Penal Interest or Overdue Charges are being levied in your Loan or Credit Card accounts then it is a Red Signal to warn you that your bank is damaging your Credit History – the reason of which must be probed and loopholes plugged immediately.
- Type and Length of Credit: Loans can be Secured or Unsecured Loans. Credit Mix and the Length of the Credit History contributes to an additional 25 percent to the CIBIL Scores. If you have Long Good Credit History of 10 years then you will have definitely better CIBIL Scores as compared to Individual with similar Credit History of say 3 years and Bad but Long CIBIL History of say 15 years with 10 years of Good and 5 years of Bad History. CIBIL Scores are assigned through a computerized algorithm without any manual intervention.
- Credit Exposure: The total amount of credit exposure contributes another 25 percent in assigning the CIBIL Scores.
- Other Factors: Other factors such as Credit Utilization, Foreclosure, Recent Credit Behavior, Credit Inquiries, Settlements and OTS contribute the remaining 20 percent of the score.
Your CIBIL Report and CIBIL TransUnion Score not only tell whether or not you qualify for a Loan or Credit Card, but it may also have an impact on the terms and conditions on which you can avail the loan. In one such case, we could get the rate of interest lowered by applying for the loan only after getting the CIBIL Report rectified and CIBIL Scores improved to the benefit of the borrower. The higher the credit score, the better your chances of availing the loan faster and on favorable terms. It is advisable to Check your CIBIL Report and CIBIL TransUnion Score before applying for a loan. Timely payments of loan EMIs is most important for maintaining a good credit history and a healthy credit score.
Ashok Goyal, Retd Chief Manager PNB and Renowned CIBIL Consultant in India