Credit score and CIBIL score are terms that are commonly used interchangeably when evaluating an individual’s creditworthiness. And while they both provide insights into an individual’s creditworthiness, the most important thing to know is that the CIBIL score for loan is a type of credit score. Bearing that in view, In this article, we explore in detail about credit score and CIBIL score, their significance, and how they impact individuals’ creditworthiness.
Credit Score: A Borrower’s Creditworthiness Index
The credit score is a numerical reflection of an individual’s creditworthiness, offering insight into their ability to honor financial commitments. It is a three-digit number typically ranging from 300 to 850, with a higher score indicating a lower credit risk. Credit scores are generated by credit reporting agencies or credit bureaus, such as Equifax, Experian, and TransUnion. These institutions collect and evaluate credit information obtained from different sources, including NBFCs, mortgage lenders, and credit card companies.
Credit scores are calculated based on various factors that include payment history, credit utilization ratio, length of credit history, types of credit used, and new credit inquiries. By examining these factors, credit scores provide a thorough assessment of an individual’s creditworthiness and assist lenders in assessing the probability of loan repayment.
CIBIL Score: India’s Credit Rating System
CIBIL (also known as TransUnion CIBIL because of its partnership with Chicago-based TransUnion) is one of India’s four credit rating agencies that play a vital role in assessing loan risk and pricing credit in India. The full form of CIBIL is Credit Information Bureau (India) Limited. It is responsible for generating CIBIL scores, which are widely used by lenders in the country. The CIBIL score follows the same concept as a credit score, providing a numerical representation of an individual’s creditworthiness based on their credit history.
The CIBIL score is a three-digit number ranging from 300 to 900, with a higher score indicating lower credit risk. CIBIL scores are generated by analyzing an individual’s credit data obtained from banks, financial institutions, and other lenders across the country. The factors considered for calculating CIBIL scores are similar to those used for credit scores, including repayment history, credit utilization, credit mix, and credit inquiries.
The CIBIL report consists of six sections, each providing different information about the borrower’s credit profile:
- Credit Score: The credit score is calculated by CIBIL based on the borrower’s credit behaviour, as reflected in the ‘Accounts’ and ‘Enquiries’ sections of the CIBIL report. It ranges from 300 to 900, with a score above 700 generally considered good.
- Personal Details: This section contains the borrower’s personal information, including their name, date of birth, gender, PAN number, voter’s ID, and other relevant details.
- Contact Details: In this section, the borrower’s contact numbers and addresses are reported. Multiple numbers and addresses may be listed, depending on the information gathered from various financial institutions.
- Employment Details: This section displays the borrower’s monthly income, which is reported by banks and other financial institutions that the borrower has engaged with.
- Account Information: This section presents a breakdown of the borrower’s credit accounts, comprising loans, credit cards, and related particulars. It includes the account type, credit limit, outstanding balance, payment history, and any defaults or delinquencies.
- Enquiry Information: This section lists the entities or individuals who have made inquiries into the borrower’s credit report. This section covers both ‘hard’ inquiries, which arise from the borrower’s credit applications, and ‘soft’ inquiries, which occur when entities access the borrower’s credit report for non-lending purposes, like potential employers.
Difference between Credit Score and CIBIL Score
The primary difference between credit score and CIBIL score for personal loan lies in their scope and geographical coverage. Credit scores are used globally and are generated by credit reporting agencies like Equifax, Experian, and TransUnion. They provide a broader assessment of an individual’s creditworthiness, applicable across different countries.
On the other hand, CIBIL scores for loans are specific to India and generated by CIBIL, which is the predominant credit information company in the country. CIBIL scores focus solely on an individual’s credit history within India and are widely used by Indian lenders to assess creditworthiness.
While credit scores consider various factors to assess creditworthiness, CIBIL scores specifically focus on credit data provided by Indian financial institutions. The algorithms used to calculate credit scores and CIBIL scores for personal loans may also differ, as each credit reporting agency or credit information company may have its own proprietary methodology.
Needless to say, it is crucial to regularly monitor your credit score or CIBIL score and take the necessary steps to maintain a healthy credit profile. By staying informed about your creditworthiness, you can identify areas for improvement and ensure better financial opportunities in the future.