What is CIBIL Score? A Detailed Analysis

‘What is a CIBIL Score? A Detailed Analysis’ is an essential post in a series where we are trying to understand some of the basic banking terms necessary in personal finance. The name ‘CIBIL’ may be a new term for many of our readers. However, if you have ever visited a bank to take a loan, you might have encountered it. Your bank takes a look at it before giving you any credit. Thus, understanding the word ‘CIBIL’ can save thousands of rupees or even Lakhs. Let’s see how it happens.

What is CIBIL Score?

Your ‘CIBIL Score’ is a three-digit numeric score ranging from 300 to 900. The higher, the better. It takes information from your credit history or CIR (Credit Information Report). CIR is nothing but a detailed report of your credit history across banks or financial institutions and loan types with other essential information.

[Loans can be secured or unsecured. A secured loan is a type of mortgage where the lender takes possession of collateral provided by you and gives you a loan, e.g., home loan. Your home is collateral here. In case of non-payment of EMI, the bank can take action and seize the house. Similarly, in an unsecured loan, the lender will check your savings, income, and debt and provide you a loan without any collateral. Hence, they charge you a higher interest rate for such types of unsecured loans. A personal loan is the best example of an unsecured loan.]

Thus, in simple terms, CIBIL Score is only a three-digit figure that tells your creditworthiness based on your last 24-month credit behavior. However, the CIBIL report is a more detailed record consisting of your name and address details, employment details, credit details, and takes into account the last 36 months of credit behavior.

Therefore, if you need to know a detailed analysis of your current credit status, go for a detailed CIBIL report instead of just checking the CIBIL score.

Authorized Organizations in the Industry

There are only four organizations in India that are authorized to generate a CIBIL score for you, collecting your credit history across the banks.

The word ‘CIBIL’ stands for ‘Credit Information Bureau (India) Limited.’ However, it is better known as ‘TransUnion CIBIL’ today. It is the first credit information company in India that established in the year 2000.

‘TransUnion’ is an American multinational company, and ‘TransUnion CIBIL‘ is a part of the company that is operating in India. For your kind information, it serves 600 million individual credit files and 32 million business credit files as of today.

However, TransUnion CIBIL has three competitors in India. They are CRIF Highmark, Equifax, and Experian. So, these are the four organizations in India who take care of our Credit Information.

The Credit score calculated by ‘TransUnion CIBIL’ is called ‘CIBIL Score.’ The other three Organizations give you a ‘Credit Score.’ Therefore, they are the same and equally valid.

Why is the CIBIL score vital for you?

Once you submit a loan application to a bank or any organization that provides credit, the first thing they check is your ‘CIBIL Score.’ You may require a secure loan like a home loan or an unsecured one like a personal loan. Things are a little bit the same.

A few decades ago, I remembered bank officials visiting your home and asking various questions to you and even asking your neighbors about your financial positions if you had no credit history. Moreover, they were also asking the same information from other banks of the locality.

Gone are those days, and we are in the 21st Century. Banks no longer need to visit your home or ask your neighbors about your creditworthiness. They can go straight to the CIBIL and check your CIBIL and report. Your lender looks into the CIBIL report to find your credit history, repayments, current EMIs, defaults (If any), current employer, income, spending pattern, etc. That helps them to decide if you are eligible to get a loan or not.

The story doesn’t end here. A higher CIBIL Score comes with a lower interest rate and vice-versa. In other words, if you have taken loans previously, and repaid it diligently, then your score may be closer to 900. In that case, your interest rate falls drastically, and you can save thousands of rupees depending on the amount of loan. The argument is the same for Credit Card also.

Let’s understand it with examples.

Scenario 1

Mr. Harsh went to a local bank to take a personal loan. He works in a private company and earns Rs 50,000 per month. However, he suffered from massive debt with many EMIs; that is almost 60% of his income. Now, the bank considers his CIBIL score that is 620, and his EMI to Income ratio is also at 60%. The bank rejects the application.

An EMI to Income ratio refers to the amount of EMI over net income. 

The calculation is simple: – EMI/Net Income (In %). The ideal range is below 30%.

Scenario 2

Mr. Abinash goes to a local bank to take a home loan. He works in the same company and earns Rs 45,000 per month. He had taken an auto loan a few years ago but paid it diligently without any delay. His CIBIL score is 850, and his EMI to Income ratio is 0. Thus, the bank approves his home loan at a 7% interest rate.

Mr. Abinash took the home loan amounting to Rs 25,00,000 for 20 years. Now, he has to pay Rs 19,382 towards his monthly home loan EMI. He has to pay a total of Rs 46,51,680 (19,382*12*20), including the interest amount. That means he has to pay Rs 21,51,680 as interest only.

Scenario 3

Let’s take the case of Mr. Debabrata now. He also works in a private company and earns 60,000 per month. He had taken a car loan four years ago. However, due to his careless attitude, he had missed a few EMIs, and thus his CIBIL score is now 605. He approached a bank for a home loan, but due to his poor CIBIL score, banks settled the interest rate at 8.5%. However, he has no other option but to take the loan.

Mr. Debabrata took the home loan amounting to Rs 25,00,000 for 20 years. Now, he has to pay Rs 21,696 towards his monthly home loan EMI. He has to pay a total of Rs 52,07,040 (21696*12*20), including the interest amount. That means he has to pay Rs 27,07,040 as interest only.

However, if you compare the money paid in the form of interest, Mr. Debabrata has to pay Rs 5,55,360 more than Mr. Abinash due to his compromised CIBIL score. That’s why I told you that understanding these banking concepts will make you productive. There is an old saying, ‘A penny saved is a penny earned.’

You can use any online EMI calculator to calculate your EMI for any loan. Further, I think you will not make a mistake and check your CIBIL score before applying for a loan.

The bottom line

Whether you are planning to take a loan, you have to keep a look at your CIBIL score. You don’t know when you are going to apply for a loan. It is essential because it saves a tremendous amount of money. Just remember that it is not only a three-digit number; it may be a few Lakhs in terms of money.

Learning these terms and intricacies of personal finance may be boring for you, but remember it always pays you. In the next episode, you will learn how to check your CIBIL score free of cost and ways to improve it.

I hope you enjoyed the post, then don’t forget to share it with your loved ones. I also need your comments, suggestions, remarks to create more value for you.

Thanks and regards,

finguru@finlessons.com

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