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What is the CIBIL score and why does it matter?

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What is the CIBIL score and why does it matter?
February 16, 2024

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In the course of your financial journey, it matters how you handle your credits. The first thing that the lender is interested in is whether you will be able to pay the dues on time. This is where the CIBIL score plays a pivotal role. It presents a picture of your creditworthiness, marking your eligibility to get a loan or even an insurance. Obviously, more creditworthiness implies a lesser chance of payment default and subsequently lesser risk for a lender or an insurer. 

So, if you are planning to get a life cover, it’s crucial to understand What a CIBIL score? is and does it really matter if you are getting an Insurance?  

  • What is a CIBIL score?

The CIBIL (Credit Information Bureau India Limited) is your creditworthiness numerically presented. It is based on your credit history comprising details of your credits, repayments, defaults and outstanding balances. As mentioned on their website, typically, the score ranges between 300 to 900 and provides a reflection of one’s credit behaviour based on records. The higher the score and closer to 900, the more creditworthy a person will be considered. Consequently, the chance of getting a loan application approved will also increase.  

  • Factors on which the CIBIL score is based

The following are the key determinants of the CIBIL score:

  • Credit history: Comprises the details of your credit records like date and schedule of repayments, settled credits, outstanding amounts, late payments and defaults.

  • Credit utilization: The ratio of your current credit card balance to your credit limits. The lower the ratio, the healthier your financial status.

  • Length of credit history: Longer the credit history, the better data on creditworthiness available.

  • Types of credit: A good mix of secured and unsecured credits like credit cards, loans and mortgages can be a positive influence.

  • Credit accounts and enquiry: Multiple credits and quick enquiries might represent you as a risky client.

  • Why does the CIBIL score matter in insurance?

Usually, a person is considered creditworthy or less risky as a borrower or a policyholder if he has a history of paying his dues on time and holds less amount of outstanding credit. A CIBIL score is the numeric representation of an individual’s credit behaviour, a high value represents strong creditworthiness. 

Banks, Insurance companies or NBFCs trust the CIBIL score to gauge whether it will be risky to associate with a potential client. Here it is assumed that the person concerned is more likely to pay the insurance premiums or EMIs on time. On the contrary, an individual with a low CIBIL score is considered risky and is assumed to have a higher probability of payment default. Thus, the higher the CIBIL score, a person is more likely to get the insurance or loan on favourable terms and conditions.

  • Does the CIBIL score affect insurance premiums?

Insurance premiums are not directly correlated to the CIBIL score. But yes, the CIBIL score does impact the chance of getting insured and the overall experience. When you apply for life insurance, the insurer checks your financial background to estimate the risk of non-payment or higher coverage before issuing the policy. With a great CIBIL score, the insurance company will consider you as someone with a good credit background and financially fit to pay premiums as per schedule. In turn, they might go easy on income-proof evidence, and issue a higher coverage policy with a quicker approval.

On the other hand, a poor CIBIL score might result in a greater requirement of income evidence, higher premiums or even refusal of a policy application.

  • What to do when your CIBIL score is low? 

A low CIBIL score can hinder your life insurance purchase or bring unfavourable conditions along. To battle that, you need to improve the score. Here’s how to do it:

  • Check your CIBIL score

  • Create a budget to ensure timely payments of bills, insurance premiums, credit card or loan EMIs and reduce outstanding loans.

  • Mix and diversify your credit like loans, credit cards and mortgages for a healthy financial credit score.

  • Avoid opening multiple credit accounts.

  • Can Insurance impact the CIBIL score? 

While a CIBIL score affects your overall insurance, it’s also the other way around. Being a trusted customer for your insurance company can in turn contribute to an increase in the score itself. Thus, if you pay your premiums on time, it’s likely to increase your creditworthiness and add up points to fetch you a higher CIBIL score. Subsequently, your future loans and insurance get secured. Isn’t that a win-win?

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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