Credit score
Also written CIBIL score · Credit rating of an individual
The number a credit information company builds from your loan and credit-card repayment history, and the first thing a lender looks at when your application arrives.
In plain language
Every time you repay a loan instalment or a credit-card bill on time — or fail to — the lender reports it. A credit information company collects those reports from every lender you have ever borrowed from and condenses your record into one number.
That number is your credit score, and the workbook describes exactly what it does: the credit score works as a first impression for the lender. A low score and the application may be rejected at that point, without the lender looking further. A high score and the lender goes on to consider the rest of your details to decide whether you are creditworthy.
It is a first impression, though — not a verdict. That distinction is examined.
How it works
The infrastructure, as the workbook sets it out:
- Credit Information Bureau (India) Ltd (CIBIL) is India's first credit information company, also commonly called a credit bureau.
- CIBIL collects and maintains records of the loan and credit-card payments of individuals and of non-individuals (commercial entities).
- Lenders submit these records to CIBIL on a monthly basis.
- From that information, a Credit Information Report (CIR) and a credit score are developed, enabling lenders to evaluate and approve loan applications.
- A credit bureau is licensed by the RBI and governed by the Credit Information Companies (Regulation) Act, 2005.
- The Reserve Bank of India requires all credit bureaus to give one free full credit report every year to all consumers.
Alongside the score, a bank applies the 5 Cs of credit — Capacity, Character, Capital, Collateral and Conditions — to the application as a whole.
And the sentence candidates skip: the decision to lend is solely dependent on the lender, and the credit score or credit report does not in any manner decide if the loan or credit card should be sanctioned or not.
A worked example
Two applicants walk into the same bank for a Rs 30,00,000 home loan over 20 years. Both earn Rs 1,10,000 a month.
Anil has paid every credit-card bill and car-loan EMI on time for nine years. His score is high; the bank moves straight to income documents and sanctions at, say, 8.5% — an EMI of about Rs 26,000.
Vivek missed four card payments during a bad year and settled one personal loan short. His score is low. The workbook's own description applies: if the credit score is low, the lender may not even consider the application further and reject it at that point. Suppose a second lender does sanction, but at 9.5% — an EMI of about Rs 27,950.
The gap is Rs 1,950 a month, which over 240 months is Rs 4,68,000 of extra interest on the same house, for the same salary. Four missed card payments, years earlier, priced at nearly five lakh rupees.
Vivek was entitled to one free full credit report every year and had never taken it. The errors he later found and had corrected had been sitting in his report for three years.
Why NISM asks about it
Chapter 8 (Borrowing-Related Products) covers the credit score immediately after the 5 Cs of credit. The facts that carry marks: CIBIL is India's first credit information company, records are submitted by lenders monthly, a bureau is licensed by the RBI under the Credit Information Companies (Regulation) Act, 2005, and one free full credit report a year is a right. Expect a true-or-false on whether a credit score by itself decides a sanction — it does not.
Common exam traps
- A credit score does not sanction a loan. The workbook says the decision is solely dependent on the lender. Any option saying a high score guarantees approval is wrong.
- CIBIL is a company, not the score. "CIBIL score" is everyday shorthand; the exam distinguishes the bureau from the number.
- Credit bureaus are licensed by the RBI, not by SEBI. The governing statute is the Credit Information Companies (Regulation) Act, 2005.
- The free report is one full report a year, from every bureau, for all consumers — not a paid service.
- Records are reported monthly, so a missed payment does not vanish next week, and a correction takes a cycle to appear.
- The score is not one of the 5 Cs. The 5 Cs are Capacity, Character, Capital, Collateral and Conditions; the score is evidence a lender uses when judging Character and Capacity.
Where this is taught
- Series SEBI-ICE · Chapter 8: Borrowing-Related Productsintroduced here
- Series X-A · Chapter 4: Debt Management and Loansintroduced here
Related terms
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- Credit Information ReportThe document a credit bureau such as CIBIL produces from a borrower's loan and credit-card payment history, used by lenders to evaluate a loan application alongside the credit score.
- Financial planningThe process of estimating what a person will need money for across their lifetime and building an investment plan to meet each of those needs — savings with a purpose attached.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.
- EMIThe Equated Monthly Instalment — the fixed monthly payment on a loan that covers both interest and a portion of the principal, calculated so the loan is fully repaid by the end of its term.
- Debit cardA card linked to your own bank account, used at ATMs and to pay at shops. It spends money you already have, so there is no interest and no credit history needed to get one.
- Reserve Bank of IndiaIndia's central bank, set up on April 1, 1935 under the RBI Act. It runs monetary policy, regulates and supervises banks and NBFCs, is banker to the Government and lender of last resort.
- LiabilitiesWhat you owe to others or have borrowed from them, such as a home loan, a car loan or money borrowed from a person. Assets minus liabilities gives your net worth.
- Small Finance BankA category of bank introduced by the RBI that takes small deposits and gives small loans, mainly to people and small businesses the banking system does not reach well.
- OverdraftA bank facility that lets a customer take a short-term loan to meet urgent needs, and repay it within the timeline agreed with the bank. PMJDY accounts carry one, limited to one account per household.
- Personal loanAn unsecured loan from a bank that can be used for any purpose — such as paying off debt, a marriage, or a vacation — with no collateral required.
- Debt to income ratioMonthly debt servicing commitment divided by monthly income — the ratio that says whether a household's income can carry the loans it already has, let alone another one.
- Debt trapThe state a borrower reaches once debt is being used to meet ordinary living expenses, so fresh borrowing becomes necessary to service the borrowing already outstanding.
- Credit Information CompanyAn RBI-licensed company that collects borrowers' repayment records from lenders, stores them, and supplies credit information reports and credit scores to specified users.
- Free Full Credit ReportThe complete credit report, including the credit score, that RBI requires every credit information company to give each individual borrower once in a calendar year at no charge.
- Revolving creditCredit card borrowing that arises when the bill is not paid in full by the due date and the balance is carried into following cycles — at 3% a month, a compounded 42.6% a year.
- MoratoriumA period in which loan repayments are paused because of extraordinary conditions, without being treated as a default — while interest keeps accruing on the outstanding balance.