Common misconceptions about CIBIL score calculation

CIBIL or the Credit Information Bureau of India keeps a record of an individual’s credit related activities with all the financial institutions, lenders and banks (including outstanding balances, credit limits, EMI, credit card payments). This record gives an insight into a person’s credit usage patterns. CIBIL generates a three digit number called a CIBIL Score that summarises the credit information and aids in the evaluation of borrowers on a standard scale. Banks check the credit score and credit report to make their credit approval decisions.

As the significance of maintaining a good CIBIL Score is increasing, rampant myths have cropped up which have left people confused. This article attempts to debunk some of the widely spread misconceptions surrounding this financial tool.

Myth #1: Enquiring about your own CIBIL score will bring it down.

When you check your own credit report or score, it is considered a soft enquiry and is not taken into consideration while calculation the score. On the other hand when a lender checks on it for the purpose of evaluating your credibility it is a hard enquiry that gets recorded on the report and impacts the CIBIL score calculation. A series of loan applications in quick succession will generate multiple hard enquiries and have a negative bearing on the score. It is actually a good financial practice to keep a regular check on your score to track your credit health. You can check your score from the bureau by paying a nominal fee.

Myth #2: Close your credit cards to improve your score.

This is the most dangerous myth hovering around the CIBIL Score. Contrary to this belief, closing credit cards will actually bring the score down. When you forgo a card, your total available credit limit declines, and the credit utilization percentage increases. CIBIL score calculation largely takes into account the credit utilization ratio. A high ratio will push your score down.

Length of the credit history is another significant factor that affects CIBIL score calculation. So if you have old credit cards, in which you have displayed good credit behaviour, do not bother closing them. Firstly, a history of payments within the due dates on those cards will positively affect your score. Secondly, they add to the available credit limit you enjoy, and help in reducing the utilization ratio. Hence it makes sense to hold on to such cards, even if you do not use them.

Myth #3: Prefer cash over credit to raise your score.

Indians have grown up with the belief that borrowing money is a bad thing. On those lines they think that if they make cash payments and avoid credit completely it will keep their CIBIL Score in good shape. But contrary to this perception cash transactions do not have any bearing on the CIBIL score calculation. The one and only thing that affects the score is the credit history. If you do not use your credit line you cannot build your credit history and bureaus will not assign you any score at all. You will find it difficult to get loans sanctioned in case you need them for emergencies. The trick is to avail loans and make purchases with your credit cards, and make timely repayments. Such credit behaviour will be rewarded with an excellent credit score.

Myth #4: A bad credit score cannot be restored.

A credit score is a reflection of one’s financial behaviour at a particular point in time. In case you have a bad credit score, it may lessen your chances of loan approval in the near future, but it isn’t a closed chapter. With judicious planning you can get your financial life back on track. Apart from making on-time payments you can take help of professional help from credit management companies who will help you draw out a plan to restore your credit records.

Myth #5: CIBIL score calculation takes into account factors like Education level, Occupation, income, bank balance, place of living and marital status.

None of these factors play any role in calculating your CIBIL score. In fact CIBIL does not even have access to such information. A credit score only reflects how responsibly you handle your credit. It only depends on the credit information like the number of loans taken, total available credit limit, outstanding balances and credit repayment patterns.

Myth # 6: Being a guarantor does not affect credit score calculation.

You will not lose points on the credit score for acting as a guarantor for a loan taken by your friend. But if your friend fails to make timely payments of his debts the onus will lie on you. If you fail to pay the amount your credit score may plummet.

Credit scores affect your financial life significantly. Misconceptions and erroneous understanding regarding CIBIL Score calculation can lead to serious repercussions. Hence it is good to know what affects the score and what does not.

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