How to read CIBIL Score and Risk Index?

How to read CIBIL Score and Risk Index is one of the most common query from my readers. In layman terms CIBIL Score is nothing but risk assessment / credit worthiness of a potential borrower based on past credit history. Though CIBIL Score and Risk Index is the 1st level shortlisting criterion by the Mortgage Lender. Executives of financial institutions who have access to this data are not competent enough to explain the CIBIL Score / risk index to borrowers. It create panic situation among borrowers. Recently one of my client called me and told that his consumer loan is rejected because his CIBIL Score is very low. I checked with him, what is his CIBIL Score. He told me that his CIBIL Score is 2. Unfortunately 2 is not a CIBIL Score but Risk Index. Worst part is that executive of financial institution referred him to some shady online agency, Which charged Rs 10,000 to Improve CIBIL Score. I explained him that currently his credit history is less than 6 months therefore Risk Index is returned by the CIBIL database which is 2 i.e. High Risk customer. Once the credit history is more than 6 months, he will get CIBIL Score between 300-900 instead of Risk Index between 1 to 5. After 2 months, his CIBIL Score was 670 and agency sent him a long self-congratulatory letter mentioning that they helped him to increase CIBIL Score (Read Risk Index) from 2 to 670. Now he wish to further increase his CIBIL Score from 670 to 750, he has to pay Rs 10,000 more.

How to read CIBIL Score and Risk Index?

CIBIL basically divide all Individuals / potential borrowers into following 3 categories. We will understand CIBIL Score / Risk Index in each category separately.

(a) Individuals with either No Credit History or Credit History not reported to CIBIL.

(b) Individuals with less than 6 months Credit History

CIBIL Score / Risk Index returned for each of the above mentioned category of potential borrowers is different. Lets check out how to read

(a) Individuals with either No Credit History or Credit History not reported to CIBIL:

In this category, the index returned is either NA (Not Available)or NH (No History). What it implies is that individual has No credit history and / or Credit History is not reported to CIBIL by the financial institution. Let me clarify that NA or NH cannot be classified as low score or poor credit history. It simply means there is no credit activity registered or reported. Now one of my client whose CIBIL index was NA, asked me if NA or NH is not viewed negatively by the financial institution then why her Home Loan was rejected. Answer is very simple, some financial institutions have policy not to lend with NA or NH index. In short, in the absence of risk index / CIBIL Score financial institution has no criterion to check risk assessment.

(b) Individuals with less than 6 months Credit History

In this category, CIBIL return Risk Index between 1 to 5 therefore as i explained in above mentioned example that 2 is not a CIBIL Score but risk index of the potential borrower. Lets check how to read Risk index between 1 to 5

High Risk: Index of 1 and 2

Medium Risk: Index of 3

Low Risk: Index of 4 and 5

In my clients case, the loan was rejected because of high risk index of 2. To maintain good CIBIL score, it is advisable to follow good credit practices from the beginning. I observed that most of the Low CIBIL Score cases handled by me were outcome of ignorance of a borrower initially. I always advocate that banks should appoint qualified Credit Counselors instead of executives with not even bare operational knowledge.

(c) Individuals with more than 6 months Credit History in last 2 years

In this category CIBIL Score is returned i.e. value between 300 to 900. Higher the CIBIL score, lower the risk and vice versa. As i keep highlighting that high credit score does not guarantee sure shot loan / mortgage. CIBIL Score depend on 70 parameters to arrive at your CIBIL Score. It is critical to find out parameters which are impacting CIBIL Score negatively. CIBIL Score can be linked to credit worthiness of an individual. Lets check credit worthiness

Score between 300 to 600: Very Poor

Score between 600 to 700: OK

Score between 700 to 775: Good

Score of more than 775: Marvelous

Normally people have tendency to compare CIBIL Score / Risk Index. Sometime back, one of my blog reader was quite furious as bank A rejected his Home Loan with CIBIL Score of 760 and approved his friends Home Loan with CIBIL Score of 730. When i checked his CIBIL Report, i found that his credit utilization was high therefore any comparison is non-standard.

Let me admit that Banks and financial institutions are quite proactive in reporting defaults by customer. whereas they skip reporting of good credit practices of customer. One of the most common casualty is Secured Credit Card. In most of the cases, secured credit card details are not reported to CIBIL by the banks. It defeats the whole purpose behind secured credit card. Most of the people opt for this credit card to improve their CIBIL Score or Risk Index. If it is not reported then you should immediately bring it to the notice of a bank.

Lastly, as i always request that before applying for any loan or mortgage you should check your CIBIL Score / Risk Index to avoid any future shocks. You can take all corrective steps to improve your CIBIL Score / Risk Index in advance. Its a misconception that your CIBIL score is impacted if you check your CIBIL Score. Fact of the matter is that you can check your CIBIL Score as many times as you can. It will not impact your CIBIL score negatively. You can pull out your CIBIL Report online. Click Here to get your online CIBIL Report.

To summarize, It is always advisable to understand the CIBIL Report before arriving at any conclusion. If your loan is rejected you have right to know the reason for rejection. Blanket answer from financial institutions that “Your CIBIL Score is LOW” should be supported by logical reasoning. High Risk Index is not the end of the road. You can always improve your CIBIL Score with good credit practices.

CLICK HERE if you wish to avail personalized consultation to improve your CIBIL Score.

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