CIBIL or Credit Information Bureau (India) Limited score is a three digit summary of a borrower’s credit history, rating and report, and thus is an indication of any borrower’s credibility as well as their ability to repay business loans. Ranging from 300 to 900, this score is built over time and as borrowers take out business loans or any kind of credit for various purposes from lenders such as banks and financial institutions. Typically, the closer to 900 the score is, the better the rating will be.
How is CIBIL score calculated?
There are few factors that contribute towards the assessment of the CIBIL score, including:
- Credit repayment history – This makes up 35% of the credit history and thus, crucial when availing any small business loan.
- Type of credit taken and repayment duration – These contribute 10% and 15% respectively, to your credit score. It is advised that a balance of credit (in other words, a combination of secured and unsecured loans) is shown to create a positive impact. Also, the duration of repayment evaluates the timely repayment as had been agreed with the lender.
- Frequency of credit enquiries – Credit enquiries are also reflected in the CIBIL score. Multiple enquires and especially unsuccessful ones can negatively impact your credit score as they imply that the creditor does not find you financially capable of repaying a loan.
- Existing debt and credit utilisation – This segment makes up 30% of the credit score. It assesses how much has been credited to you and how much of that loaned amount has been utilised. It must be noted that overcharging your monthly credit limit can negatively impact your CIBIL score.
What does CIBIL score 1 mean?
It means that there is no relevant information to report about the borrower’s credit history. It must be noted that credit score 1 can negatively impact the application for an online business loan.
How does CIBIL score contribute towards taking out business loans?
CIBIL maintains credit information of more than 600 million individuals and 32 million businesses and therefore plays a vital loan in the loan application process.
When a potential borrower approaches a bank or a financial institution for small business loans, the lender will review their CIBIL score for credit-worthiness. If the score is low, the bank may not process the application further. But if the score is high, they might consider the application and review other details such as the requested amount, potential business loan interest rate, etc. before making the decision about sanctioning it.
Keeping a good and healthy CIBIL score is important and it can be achieved by practicing financial prudence: timely payment of credit card bills and EMIs, no defaulting on debt, etc.