There are various types of credit – both among loans and credit cards – that can determine what your CIBIL score looks like.
When you apply for fresh credit, you need to ensure that you score is ‘good’ or healthy. There are various factors that go into determining your score, which include your repayment history, the number and type of accounts you hold, the length of credit history and the number of new accounts you have open. Each of these parameters has a different weightage on your credit score. Because of this, it is a good idea to keep track of the credit you are using and the effect that it will have on your score.
What then is a CIBIL score?
A credit score is a three-digit representation of your creditworthiness, i.e. it tells a lender about both your intention as well as ability to repay any debt you have availed of.
Every credit information company or bureau provides these scores. In India, there are four bureaus namely, CIBIL, Equifax, Experian and CRIF High Mark. With CIBIL having the first mover advantage by being the first bureau in the country, credit scores are often generically known as CIBIL scores. You can however call for your score from any or all of the bureaus.
Types of credit and your CIBIL score
When you do take on credit, be it a loan or credit card, for example, having a mix of credit helps. It shows that you are likely to be a responsible person, able to handle credit well and hence can have a positive impact on your score. As a result, chances that you are likely to default on payments reduce.
- Secured loan – Those with collateral backing, such as a home or auto loan
- Unsecured loan – Popular examples of this type of loan product, where no collateral security is provided, is a personal loan or credit card
Of the two, secured loans work in your favour as there is an asset attached – if you skip making payments, your property or car can be repossessed by the bank or financial institution that had loaned you the money to make the purchase. Ultimately, if there is a risk of losing something, one is more likely to pay!
When you make timely payments towards your loan EMI, your credit score get notched up favourably. Any delays or missed payments immediately bring down the score.
With unsecured loans, lenders tend to view these loans (and borrowers) with slightly more caution, especially if your credit report shows more of this product compared to secured products. The chance of payment default is higher in the case of someone who solely relies on unsecured loans, as there is a possibility of insolvency.
Credit cards can prove to be problematic in an entirely different league, if not used judiciously. It is very easy to rack up spends on a credit card owing to the sheer convenience they offer. It can be tempting therefore to purchase things for more than you can repay, but that can lead into a deeper debt trap. Ideally, stay well within the credit limit assigned to you, and utilise no more than 30% of the credit utilisation ratio. With that, and timely payments (ideally in full), you credit score will not be affected negatively.
Before you apply for fresh credit, do call for a copy of your credit report. You will be able to take stock of the situation, and decide whether new credit is indeed required – essentially, your CIBIL score will tell you where you stand. If you open several new lines of credit say within a time span of six months or so, lenders will tend to view the same unfavourably – it tells them that managing your budget seems difficult, or that you can’t pay off what you owe.
Hence, to make sure your score remains good; do try to have a healthy credit mix, as each of these contributes significantly to your score. Remember, the key to a healthy financial future lies in your credit score – so treat it wisely and well. It is crucial not only to maintain it, but how to boost your credit score is equally important.
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