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What is CIBIL Credit Score Algorithm

CIBIL assigns a three-digit score, known as the credit score or the CIBIL score, to every borrower in the country. This three-digit number ranges from 300 to 900 and is used by financial institutions across the country to determine the creditworthiness of prospective borrowers. CIBIL has a unique algorithm that uses the details provided by the various financial institutions to calculate the credit score of the borrowers. Some of the factors that influence the credit score of an individual include their repayment history, credit utilisation ratio, types of loan accounts and length of credit history of the person.

 

CIBIL Enhances Their Credit Score Algorithm

If you are noticing a sudden decrease in your CIBIL score, it is important to know that TransUnion CIBIL, the company which is responsible for maintaining the score, has altered the algorithm used to calculate the number. However, many lenders have said that a lower score won’t necessarily hurt one’s chances of approval of a loan as they have taken into account the new CIBIL score algorithm to tweak their lending policies.

What does the Recent CIBIL Score Algorithm Update Include

CIBIL introduced a major change in its credit scoring algorithm in March 2020. The biggest change in the CIBIL score algorithm is that it considers 36 months of credit history now, compared to 24 months earlier. Another important departure from the past is that it now also rates borrowers with less than six months of credit history, whereas one had to build six months of credit history before getting a number earlier.

Here are some of the new factors included in the modified CIBIL score algorithm, according to the TransUnion CIBIL website:

1. Depth of credit, i.e. the duration of your existing credit history as calculated from the date when your oldest credit account was opened.

2. Number of old accounts closed and new accounts opened.

3. The trend of one’s outstanding balances over the long term.

4. The ratio of the repayment amount to the total amount due on a loan.

5. The transaction history of an individual or entity on their credit card(s).

What Does the CIBIL Score Update Mean for You

If the change in the CIBIL score algorithm has caused your credit rating to drop, it doesn’t mean that any of the factors that determine it has deteriorated. For instance, it might have dropped even if you have paid back all your loans. The update only widens the scope of the calculation rather than downgrading one’s creditworthiness. As such it wouldn’t change the way a lender views your loan application, according to the TransUnion CIBIL website.

Another important point to note is that all lenders might not have migrated to the new CIBIL score as yet. This means that your bank might still be using your older score whereas your CIBIL dashboard shows a new score. The recalibration will take some time but eventually, all financial institutions will adopt the updated score.

A credit score is accompanied by a score analysis that tells you which factors in your profile could be improved to boost your rating. As the algorithm has changed to include more factors, the score analysis will provide an explanation of a wider number of points one could work on to have a better credit rating. The general to-do list for maintaining a good credit score however remains the same — pay your dues on time, have as minimum balance as possible and don’t apply for a lot of credit very frequently.

Conclusion

CIBIL maintains the credit information of 600 million people and over 30 million businesses. Of that, 60% had a credit score of 775 or above in January 2020 whereas the number dropped to 37% in May 2020. One need not worry if their rating dropped due to this change as lenders wouldn't just overlook such a huge chunk of the creditworthy population.

If you are still unsure, then you may take a look at the population ranking section on your CIBIL dashboard which shows where you stand with respect to other borrowers who have a CIBIL score.

A good CIBIL score can help you get a loan at a relatively better rate of interest. At Bajaj MARKETS, you can get a CIBIL report. The Credit Health Report that you get on Bajaj MARKETS is more than just your credit score. It provides you with an analysis of your financial health and helps to improve and maintain it.

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