What is the Formula for CIBIL Score Calculation?

Updated on: 05 Apr 2022 // 21 min read // Personal Loans
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A good CIBIL Score is one of the key prerequisites for loan approval. Whether you Need a Personal Loan or a Home Loan, your past credit history and credit score play a crucial role in making you eligible for affordable credit assistance.

However, a lot of borrowers are unaware about the importance of CIBIL score until the bank rejects their loan application by the bank. A CIBIL Score is directly related to financial habits, yet a lot of consumers fail to take note of it and ruin the rating unknowingly.

CIBIL score is a standard credit rating for your credit profile. So, CIBIL score calculation for Home Loan and CIBIL score calculation for Personal Loan do not vary. If your score is good for Home Loan, it is also good for Personal Loan as well. However, the difference in approval time of Home Loan and Personal Loan vary solely because of the difference like the products.

Despite regular payments of loan and credit bills, you may have a poor score. So you must understand how a credit bureau rates you worthy for a loan.

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To clear the confusion behind the credit ratings, we have compiled a consumer guide on how does a credit information bureau calculate your credit score and what all goes behind the CIBIL Score Calculation.

Herein, you must also understand that there is no formula for CIBIL score calculation. Instead, there are certain parameters that build an individual’s algorithm and analytics facilitating auto computation of Credit Score.

Additional Reading: How to improve cibil score immediately?

Factors that affect your Credit Score

Here is a quick list of common factors that affect Credit Score Calculation:

1. Credit Utilisation Ratio:

The credit bureau assesses the percentage of credit being used by the consumer as against the limit granted.

2. Defaulting/Delinquency:

Next the agency takes hold of the balance on your credit accounts. It will evaluate if there is any delinquency or irregularity in loan payment and from how long.

3. Trade Attributes:

It does matter how long you have been using the lines of credit. The lenders are interested in knowing if the consumer is using only credit cards or a mix of secured and unsecured loans. The choice of loans reflects your financial ease.

Each Credit Bureau has its own algorithm to calculate the Credit Score, and thus your Experian score, High Mark Score, Equifax Score, and CIBIL score may slightly vary from each other. However, each of the credit rating companies uses the discussed parameters for calculating a Credit Score.

Let’s focus on CIBIL credit rating to further understand the Credit Score calculation.

About CIBIL TransUnion Score:

CIBIL is the first credit information company of India that was established in the year 2000, and four years later in the year 2004, the credit rating services were introduced. Since then, CIBIL Score is treated as a benchmark credit rating for individuals and businesses. More than 2400 banks, NBFCs, and financial institutions submit credit information of more than 550 million users to help CIBIL formulate credit rating of individuals and businesses.

In 2016 TransUnion acquired stakes in CIBIL and CIBIL became CIBIL TransUnion. The CIBIL score is calculated within a range of 300 to 900 points. The higher the score, the better are your loan approval chances. According to CIBIL, close to 80% of people availing loans in India have a CIBIL TransUnion Score of 750 and above. Your high score is the proof of confidence in your credit repayment capacity.

Additional Reading: How to get loan for low cibil score?

How is the Cibil Score calculated?

Here is a quick break-up on what goes behind CIBIL Score calculation:

1. Credit history:

One of the major factors to contribute to your CIBIL Score is your Credit History, i.e., how well did you perform in repaying your past obligations. As much as 30 percent of your CIBIL score is based on regular payments of your credit card bills and Loan EMIs before the due date.

2. Credit mix and length of credit history:

The duration of credit history and how well you optimize your credit profile with a right mix of secured and unsecured loans can boost your score by 25 percent.

3. Credit Use:

Another 25 percent of your score depends on the amount of credit you utilise. The score is calculated based on your monthly income, monthly EMIs, credit limit availed and used.

4. Other factors:

Other factors such as credit utilization ratio and recent credit behaviour also contribute to your credit score by 20 percent.

Credit utilisation ratio is the percentage of credit limit used to total limit granted. For example: If you own two credit cards with a limit of Rs 100000 and Rs 50000, your total credit limit would be Rs150000. Herein, say, you are using Rs 60000 on the first card and Rs 45000 on the second card, the credit utilisation ratio would be 70%. As a rule of thumb, credit use above 30% of the limit is considered high and may hurt your score.

Your recent loans and loan queries to the banks and credit card usage pattern are considered as past credit behaviour. A customer consuming too much of credit too often is considered as a risky prospect. Besides, loan queries also make you look credit hungry to the lender. It is thus recommended to compare various loan online before you apply to a specific lender.

Keeping all these factors in mind, you can confidently save your score from tumbling down. It should not be a hassle anymore to maintain a good score and stay credit ready.

Also Read: How to Check CIBIL Score with Pan Card for Free?

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