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.
Check yourself
1.Which statement about the credit score is correct?
- a)A high credit score automatically sanctions the loan
- b)The lender checks it first; a low score may cause rejection without further consideration, but the decision to lend rests solely with the lender
- c)The credit bureau decides whether the loan is granted
- d)The credit score is checked only after the 5 Cs are assessed
Show the answer
Answer: (b) The lender checks it first; a low score may cause rejection without further consideration, but the decision to lend rests solely with the lender
The chapter sets out a two-stage gate. "The lender FIRST CHECKS the credit score and credit report of the applicant. IF THE CREDIT SCORE IS LOW, THE LENDER MAY NOT EVEN CONSIDER THE APPLICATION FURTHER AND REJECT IT AT THAT POINT. If the credit score is high, the lender will look into the application and consider other details." The score is the "FIRST IMPRESSION". And then the sentence that disposes of options (a) and (c): "THE DECISION TO LEND IS SOLELY DEPENDENT ON THE LENDER and credit score or credit report DOES NOT IN ANY MANNER DECIDE if the loan or credit card should be sanctioned or not." So a low score can end an application before anyone reads it, while a high score only gets the file opened — after which the 5 Cs are applied. Option (d) reverses the order stated in the chapter.
2.Which of the following is NOT one of the 5 Cs in credit?
- a)Capacity
- b)Character
- c)Credit score
- d)Conditions
Show the answer
Answer: (c) Credit score
The five are Capacity, Character, Capital, Collateral and Conditions. The credit score is a separate matter dealt with later in the chapter — it is what the lender checks before applying the 5 Cs, not one of them. The chapter's definitions: Capacity — "how you intend to and what is your capacity to repay the loan"; Character — "a SUBJECTIVE OPINION as to whether or not you are sufficiently trustworthy to repay", the only one so described; Capital — "the money you personally have invested in the business and is an indication of how much you have at risk, should the business fail"; Collateral — "security in addition to that is created out of loan proceeds"; Conditions — "the intended purpose of availing the loan like will the money be used for working capital, additional equipment or inventory." Banks are said to follow a "conservative approach".
3.Which statement about CIBIL and credit bureaus is correct?
- a)CIBIL is regulated by SEBI under the SEBI Act, 1992
- b)CIBIL is India's first credit information company, licensed by the RBI and governed by the Credit Information Companies (Regulation) Act of 2005
- c)Credit bureaus collect records only of individuals, not commercial entities
- d)Lenders submit records to credit bureaus once every three years
Show the answer
Answer: (b) CIBIL is India's first credit information company, licensed by the RBI and governed by the Credit Information Companies (Regulation) Act of 2005
"Credit Information Bureau (India) Ltd (CIBIL) is INDIA'S FIRST CREDIT INFORMATION COMPANY, also commonly referred as a credit bureau. CIBIL collects and maintains records of INDIVIDUALS' AND NON-INDIVIDUALS' (COMMERCIAL ENTITIES) payments pertaining to LOANS AND CREDIT CARDS. These records are submitted to CIBIL by banks and other lenders ON A MONTHLY BASIS; using this information a CREDIT INFORMATION REPORT (CIR) and credit score is developed... A credit bureau is LICENSED BY THE RBI and governed by the CREDIT INFORMATION COMPANIES (REGULATION) ACT OF 2005." Options (c) and (d) each contradict a stated fact. Note also the entitlement worth acting on: "The Reserve Bank of India requires all credit bureaus to give ONE FREE FULL CREDIT REPORT, EVERY YEAR, TO ALL CONSUMERS" — reports routinely contain errors such as a closed loan still shown outstanding, and a borrower who never looks discovers this only when an application is refused.
Where this is taught
- Series X-A · Chapter 4: Debt Management and Loansintroduced here
- Series SEBI-ICE · Chapter 8: Borrowing-Related Productsintroduced 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 report developed by a credit bureau from payment records submitted by lenders, used along with the credit score to evaluate loan applications.
- Equated Monthly InstalmentA very popular mode of repaying a loan, in equal monthly amounts over the agreed tenure.
- 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.
- 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.