What is a CIBIL Score?
A CIBIL score is formulated by Credit Information Bureau (India) Limited to assist its members, mainly lenders and credit card providers, in making responsible lending and approval decisions. Your CIBIL score is a three-digit number which can range anywhere between 300 and 900. Any lender would look at your CIBIL Score to determine your creditworthiness. So, your CIBIL score becomes an important factor in determining whether a lender would approve your loan or not. CIBIL scores are formulated on the basis of one’s credit history, credit mix, payment history, number of enquiries, etc. A good CIBIL Score, which is considered ideal by most lenders, ranges between 750 and 900.
How to improve your score?
Given the importance of a CIBIL score in your ability to raise credit, the question then becomes how to raise your score? Well, you can increase your score by complying with the following tactics:
- Analyse your credit report
It is important to regularly review your credit reports as it would allow you analyse your credit history and various other information that you will need in order to undertake steps to rectify various issues that have a detrimental effect on your credit score. For instance, you might find late payments or defaults stated in the report which you might have overlooked. You can then undertake the necessary action to build a positive payment history. Another reason to check your credit report is to correct any discrepancies in the information mentioned in the report. Such discrepancies can hinder you in acquiring credit. Therefore, it’s always a good idea to start by analysing your credit report when you want to improve your CIBIL score.
- Be regular with your payments
Your payment history is a major determinant of your CIBIL score. Therefore, delayed payments and outstanding debt can substantially damage your CIBIL score. You should ensure that you pay your EMI and loan instalments on time. Payment delays for loans and EMIs would not only lower your score but might also lead to penalties. If you face difficulties in keeping track of various credit payments, you should set reminders so that you do not overlook due payments. You can also employ services that allow you to make automated payments, which would ensure that you do not miss deadlines. Further, if you have credit cards, you should ensure that you are not paying back merely the minimum amount due on your card. You should attempt to pay back the entire amount or a sizeable portion of it.
- Maintain a decent credit mix
Credit mix is an important constituent of a CIBIL score. Having a decent credit mix can boost your score and help you obtain credit whenever you require it. You can maintain a healthy credit mix by having a combination of secured loans, like Home loans and car loans, and other forms of unsecured credit, like personal loans and credit cards. However, it’s important to remember that having numerous unsecured credit streams can be perceived negatively. Besides, too much credit can result in financial obligations that exceed your capacity. So, it’s advisable to build your credit mix gradually and over time.
- Do not exceed your credit limit
You should be mindful of your credit limit while utilizing the credit available to you. Using too much credit would affect the CIBIL score assigned to you and would be perceived negatively by lenders. If you have a credit card, you should try to maintain the utilization rate below 30%. Your utilization rate shows the percentage of credit employed by you relative to the total credit available to you. Having a high utilization rate negatively affects the score as it indicates that your credit dependency is high. Therefore you should keep your utilization rate below 30% as it would give the impression that you are responsible with your credit.
- Apply for new credit within your limit
You should apply for credit within your credit limit and according to your financial capacity. Not doing so would give the impression that you are continuously in need of credit. You should apply for credit only if you really require it and avoid acquiring any unnecessary credit. Too much debt can affect your credit score can have negative repercussions for your CIBIL score.
- Avoid multiple loan enquiries
It is advisable to exercise a bit of self-restraint when applying for credit. Numerous loan enquiries can have a detrimental impact on your score as would indicate that you are continuously seeking excessive credit. Further, it also indicates that your loan obligations and burden may increase in the future. Also, credit enquires by lenders can result in a hard credit check which can temporarily lower your credit score. This happens because every time you apply for credit, the lender will request CIBIL for your credit report and every such inquiry will be recorded on your report. Such an enquiry can cause the score to decrease. This decrease lasts only for a few months. Another impact of making too many loan enquiries is that if your application is rejected, other lenders that you applied to would be able to see your decreased credit score and the previous rejection and may decide against lending your credit. Therefore, it would be better to space your loan requests to minimize the detrimental effect of a hard credit check.
- Be aware of your joint, co-signed, and guaranteed accounts
You should keep an eye on your joint, co-signed, and guaranteed accounts as would be equally liable for missed payments on such accounts. Negligence on part of your joint holder would also have a detrimental effect on your credit score and would affect your ability to raise credit when you need it. You should ensure that you become a joint account holder or a guarantor of loans only with a person who is responsible with their finances and would not become a liability for you. However, it would be advisable to avoid becoming a guarantor or joint account holder altogether.