What Is Credit Score or CIBIL Score : How Is It Calculated ?

Credit Score

Credit score is the measuring unit for an individual’s credit worthiness. The range of this score lies between 300 – 850. Higher the score, higher is consumer’s potential for repayment of loan. Lenders and banks generally prefer a higher credit score for lending loans to individuals. They use the credit score for measuring an individual’s earning and his potential for timely repayment of loan.

Credit score is important in for lenders for decisions relating to offering credit. The most famous credit scoring method is the FICO method. On an average a credit score above 650 is preferred. People having their score below it are termed as subprime borrowers. The lenders charge a marginal high interest rate from such people. The reason is the higher amount of risk involved.

Credit Score Ratings (FICO)

FICO stands for Fair Isaac Corporation. The method FICO was invented by them. There are stages for terming the credit score. They are :-

300 – 579 POOR
580 – 669 FAIR
670 -739 GOOD
740 – 799 VERY GOOD
800 – 850 EXCELLENT

As you can see a score of 300 – 579 is  termed poor. Any person under this category is restricted from giving loan to. The range of 580 – 669 are subprime people and they are charged with a nominal high rate of interest. People in the range of 670 – 739 are normal borrowers and they are given loans at market rates. The scoring of 740 – 799 is a very good score and they get privilege to negotiate terms of loan sometimes. The score of 800 – 850 is the best. They carry minimal risk and hence such rating is given discount in interest rates instantly.

The credit rating also determines the initial deposit for obtaining electronic accessories or products on loans or EMI. More the credit score less is the down payment required.

The credit score is also used while deciding the credit limit of an individual’s credit card.

Factors Determining the Credit Score

  • Credit card’s payment history and loan’s payment history. Delayed payment also counts
  • Rate at which credit is utilized
  • Type, number and age of credit accounts
  • Sum of entire debt
  • Bankruptcy and other public records
  • Newly opened credit accounts recently
  • No. of Inquiries regarding the credit scores
  • Length of credit history

Some of the important factors are :-

Payment History

It contains 35% weightage in the entire credit scoring. It also mentions the timeline of payments made by a person. Payment history takes into account how many times the person has borrowed. How many borrowings are outstanding and how many times has the person defaulted or made late payments for installments.

Total Amount Owed (NET DEBT)

This has the weightage of 30% in the credit scoring of a person. It takes the current credit holding of a person and compares it with actual credit capacity of him/her. Such concept is also known as credit utilization as the person uses available credit for availing loan.

Length of Holding

Length of holding credit accounts for 15% weightage. Longer the credit history less is the risk profile of the person. The reason considered is he/she is using the loan facilities frequently and used to it. Hence the more history the better is the score. This enables lenders to get access to more data and well for checking the credit potential of the borrower.

Types of Credit

It accounts for 10% of the credit scoring. It signifies the mixtures of loans or credits availed for different purposes. This divides the pool of risk among various lenders. Hence more the types of credit availed better for a low risk profile.

New Credit

It has a weightage of 10% in the credit scoring. It involves the no. of new accounts held, No. of new accounts applied for and no. of inquiries ongoing or dealt with. All this comes under the new credit weightage.

As per FICO score any credit score is highly influenced by the payment history of a person. In descending order the other factors aligned are total debt and amount of debt owed, length of credit history and last being new credit and types of credit.

What If a Person Has No Credit Score ?

If a person does not have enough credit history, he or she may not have a credit score. Also if a person is below 21 he or she should have a cosigner for availing credit and get a credit score. For instance having a credit card under a consignee (could be a parent) is a good start for availing credit and having a credit score from a small age.

Also a person can work with unions and banks for opening an account with little credit available. Another way is having a secured credit card. With early entry in credit scoring a person can have a better chance of availing high credit in early stage as credit history takes time for creation.

How to Improve Credit Score ?

Easy way to improve credit score is timely payments of credit and opening various types of credit accounts. Also having a lengthy history helps in getting a credit score early in life.

India and Credit Score

There are 4 credit information companies in India. They get the license to store people’s credit history by RBI. The oldest one is CIBIL. It came into action from 2001. It is the Credit Information Bureau of India Ltd. Other companies are Equifax, Experian and CRIF high marks. All these companies have developed their own ways for calculation of credit. In India the most famous is CIBIL score by CIBIL. People often use the term CIBIL score in exchange for Credit score.

CIBIL score is a three digit individual score for credit. It has a range of 300 – 900. In India people who have zero credit history get the scoring of -1. Also when the history is 6 months old or less than the score provided is 0. For an accurate CIBIL score the time period required is 1.5 – 2 years.

Important Sections in CIBIL Score

CIBIL score has 4 most important sections. They are :-

  • Credit history
  • Account history
  • Public records
  • Credit inquiries

CIBIL score also has almost the same method and weightage assigned to various components like FICO score. It has 35% for repayment history, 30% for Credit balance and utilization, 15% for duration of credit, 15% for new credit and 10% for types of credit accounts. CIBIL score also gives out CIBIL ranks and company credit report to businesses. Score of 700 – 750 is a good score in CIBIL.


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