5 Factors That Determine Your CIBIL Score

No one would want to take any chances when it comes to a credit score. Really, there are no back-door shortcuts for achieving that enviable score. Thus it becomes all the more important for you to understand what factors contribute in the determination of your score so that you can be in complete control of your score and nail it.

Credit score is the first check that a lender does in your background. If you have a low score, then the lender may not consider your loan application any further and reject it right there. But, if you have a high score, the lender may proceed to check further details and documentary proofs before they approve your loan. Since all your financial goals hinge on your credit score, it is in your best interest to take care of it. Ideally a score of 750 or more is viewed favourably by lenders.

Following are listed five factors that are commonly known to affect a score:

  1. Paying dues in time: When you pay your dues, whether your loan EMIs or credit card outstanding monthly dues within the due date, you display financial consciousness and that you are serious about your repayments. To reward your good behaviour, few points are added to your score. With each timely repayment, your score inches upward. On the other hand, if you pay at any time beyond the due date, your payment is marked late. It not only attracts a late payment fee but also thrusts your score downwards. Being consistently on time, helps your score scale higher whereas being late on several occasions serves as a downward force on your score.
  1. Work out your Credit utilization ratio: Whatever credits you have already availed, club together the entire limits available to you across all those credit cards and loans that open and under use. Do not include any closed accounts. Out of this, the percentage being used by you is termed as credit utilization ratio. For example, adding together the “available credit limit” as showing on all your credit card statements and the sanction limits of your loans comes to Rs. 10 lakhs. Out of this you are using only Rs. 3 lakhs. Thus your utilization ratio is 30%. The lower the utilization ratio the better it is from the point of view of a lender.

If you cut down on a credit card or request to decrease your credit card limit, it will bring down your available credit limit. This way even if you don’t increase your spending yet your utilization ratio will shoot up thus bringing down your score. Does this mean you should keep adding more and more credit cards to increase your available credit and keep that utilization ratio at bay? No. Being over exposed to credit makes lenders question why you need so much credit and view you as a person whose hunger for credit is insatiable.

However, if you feel that you need to drop a few cards from your wallet then, don’t let the thought of your utilization ratio keep you from doing so. It’s better to take a temporary hit on your score and work on other ways to improve credit score fast. Ofcourse, you need to plan in advance and make sure you do not apply for any fresh credit for atleast six months after cancelling credit cards.

  1. Credit mix: Lenders are interested in your ability to deal with different types of credit. Having a higher fraction of unsecured debt in your portfolio than secured debt has a downward impact on your score. Unsecured debts like personal loan, education loan or credit cards are those that are not backed with any collateral or asset. They are considered more risky and have a higher rate of interest as premium charged by lenders for bearing that extra risk. Whereas secured debts are like home loan, car loan, loan against property or FD or gold, etc are loans where there is an underlying asset based on which the loan is sanctioned. These are considered less risky since incase of a default a lender can sell the mortgaged asset and recover their money. These do have a lower rate of interest given their less risky nature.

If your portfolio features more unsecured personal loans then you will be perceived as a risky borrower on two accounts:

  1. Since unsecured loans have a higher rate of interest, you already have a surmounting debt and interest burden. Lenders will be sticky here and would not want to invest further with you.
  2. Unsecured loans have no collateral and therefore you may be seeking more loans to settle previous ones as earlier lenders were not able to recover their money.

Once doubt creeps into the minds of lenders, it will be very difficult to convince them of your intent to repay their money.

  1. New applications and subsequently number of enquiries: The moment you apply for any credit facility, even a small personal loan or you ask for a raise in your credit limit, the prospective lender will ask for a copy of your CIBIL report. The more the number of such “hard enquiries” from banks or other lenders, irrespective of whether you are granted the credit or not, will have a direct impact on your score.

What’s more, you will be perceived as a person who is constantly seeking credit for perhaps you are unable to manage your funds and therefore you will be more of a liability to a bank than an asset.

  1. Co-signed or Guaranteed loans: All debt applications co-signed by you, add-on credit cards given to family and also, loans guaranteed out of good faith, appear on your credit report too. Yes, if they are mismanaged then they will have a poor impact on your score and will be treated as good as your own default. Therefore, you should take good care of all those accounts too and constantly follow-up with those who are responsible for making payments on such loan accounts.

In short

Managing credit is no piece of cake but it isn’t rocket science either. The various ways to manage your score are very much within your reach and you can do justice to them by observing credit discipline. If you find it difficult to do it yourself, you must seek help of credit repair companies to do the job for you.

Happy credit to you!


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