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CIBIL has updated it’s scoring algorithm in March 2020, incorporating new data points and trends making it more comprehensive. Now, with this new feature, it will further enhance the score’s ability in predicting the loan defaults, a consumer’s creditworthiness and his/her likelihood of repaying a loan. 

Here’s below the recent changes in the CIBIL scoring algorithm: 

Old CIBIL score	New CIBIL score
The old algorithm was based on 24 months of credit history.	The new algorithm is based on 36 months of credit history.
It was available for consumers who have a minimum of 6 months of credit history	Consumers with less than 6 months of credit history will also be benefitted.

With the latest update, usage of credit cards will play a significant role in impacting the CIBIL score. Let us find out how:

Data points have been included for the calculation of the CIBIL score

1. Transaction history on credit cards
2. Long term trends of outstanding balances
3. Ratio of actual repayment amount to the total amount due
4. Depth of credit (from the day when a borrower’s oldest credit account was opened)
5. Total number of accounts operated

The Impact of the new scoring algorithm

Most of the users have registered that their CIBIL score has dropped, while few have claimed that it has improved for them. A drop in the score doesn’t imply the deterioration in the credit profile. 

With time banks and financial institutions will gradually imbibe the new scoring algorithm, by updating their policies and system. Till that time users might face inconvenience due to sudden drop in CIBIL score. 

What is CIBIL Score?

Most of us are familiar with the concept of borrowing and lending. Lending institutions always inquire about a borrower’s creditworthiness before giving loans to them. CIBIL score is an individual’s performance metric used by financial institutions to measure a borrower’s creditworthiness.

The CIBIL score is a 3-digit number representing the borrower’s credit history. The score ranges between 300 and 900. A healthy credit score will have a greater impact in availing loans at lower interest rates and other features. 

Reasons why CIBIL score is important?

An individual’s CIBIL score is of high relevance which gives the lender a clear understanding of the customer’s financial integrity. It reflects whether a borrower will repay the loan on time or not. Let us understand first how a good and bad credit score is measured:

CIBIL Score	It's meaning
300-500	This indicates discrepancies in loan repayments in the past
500-700	It shows defaults in past loan repayments.
700-500	This number will work well for secured loans. For unsecured ones, the bank might offer loans at higher rates.
750-850	Banks sanction a greater percentage of loans for borrowers at this number. One can negotiate for lower interest rates with a score of 750 and above.
850-900	This is a score which impresses the lender, reflecting an excellent past history of loan repayments.

Listed below are a few reasons why having a healthy credit score is important

For availing secured loans conveniently – For secured loans like home loan and auto loan, lenders decide on the upper limit and on the interest rate basis the credit score of the individual. Apart from providing the asset as security in case of secured loans, having a healthy credit score is equally significant.

Faster approval of unsecured loans – Applying for loans without security requires a lot of trust reasons for the lender to approve the loan. Therefore, it is very important for a borrower to have a healthy credit score while availing an unsecured loan. Poor credit score loan applications either get rejected or are offered at a very high rate of interests.

Possibility for interest rate negotiations – A higher CIBIL score loan applicant holds the power to negotiate for the better interest rates for the loan applied. An applicant can compare the deals and authoritatively bargain with the lender as a creditworthy customer. 

Chance of selecting the best credit card – Credit card companies compete with each other to give the best deals on credit card to a good CIBIL score applicant. Which otherwise one may end up paying high-interest rates or a rejection for availing a credit card.

Factors affecting CIBIL score – 

Repayment history – An applicant’s past track record is an indicator of their future behaviour. A lender is bound to inform the CIBIL when one has availed a loan or credit. If an individual is paying all the instalments on time, it is noted by the lender. When the payment is done in advance, it reflects an individual’s responsibility to repay the credit on time. This signals the lender to trust the borrower in repayment of loan.

Several Existing Loans – If an applicant has several existing running loans, it will be a matter of concern to the lender. Before applying for the loan, it is therefore advised to close the running ones. 

Drastic increase in credit – Every individual has a specific credit limit whose utilization to the maximum indicates a credit hungry behaviour. This is considered to be a negative sign by the lender. If an applicant is seen spending vehemently, it can result in a reduced score.

Apart from common factors like credit utilization, payment history (late payment or default), number of credit applications and credit mix, the new CIBIL Score also includes the following variables:

• Duration of credit (it is calculated from the date when your oldest credit account was opened).
• Long-term trend of outstanding dues
• Number of times credit cards used
• Number of new credit accounts and number of accounts closed

Ways to Improve CIBIL Score 

Measures can be taken to improve the CIBIL score if it has been impacted negatively. However, it takes a minimum of six months to reflect the changes in the credit score and improvements in the Credit report. Let us discuss below how it can be done:

Do not delay payments - Technology has made our lives simple that almost everything is available at our fingertips. One is not even required to do rounds of branch offices to get the work done. And the same goes with making payments for loans. If the EMI dues are not paid on time, it is considered as a negative feature on the part of the borrower. It is best to automate the payments thereby avoiding delays. 

Availing recent credit report – Getting a recent credit report will give you an understanding of where you stand currently. Any instance of missed payments or delayed ones requires immediate action. It is equally important to ensure it should not get repeated. It will assist in correcting any errors and accordingly setting a target for future months.

Smartly handling of debts – Credit cards debts can turn out be unmanageable if not addressed timely. If faced with such a case, closing the case with a personal loan will be considered a smart move. It will reflect how you managed in paying off the loans by paying less interest.

Having a diverse credit portfolio – An individual only dealing with unsecured loans is not looked upon favourably. One should be adept at handling a variety of credits.  A blend is necessary to show diversification.

No overutilization of the credit – Even if a user is allowed to borrow higher credit, it is advisable to refrain from doing so. It is important to maintain the debt to income ratio. 

No extension of the tenure - Increasing the tenure of the loan than the decided term, impacts the credit score negatively.

Before we wrap up

• The latest scoring algorithm is focused on Credit Cards. It will make users more responsible for handling credit cards.
• Users should refrain from applying from too many credit cards in a short span of time and settle the bills without any delay as much as possible. 
• Beginners now will not have to wait for six months to get their CIBIL score. So now, when a user will be in need of getting credit, will be at advantage. It will be available easily.
• The rejections for credit will be higher in number initially, but eventually it will be stabilized once lenders will fully migrate to the new scoring algorithm.