There is no doubt that a high or good credit score can make a significant impact to your financial life. It can offer you the best interest rates on loans and get your credit card application approved. In some countries globally, even prospective employers and insurers go through a person’s credit report to determine their creditworthiness. You never know when bagging your dream job is the result of a good credit score!
So, does it mean that there will never be a loan for low CIBIL score? Well, not exactly, but such a loan does not come at the best terms. For instance, you can wind up paying a much higher rate of interest than you would if your score had been higher.
What is a credit score?
We know what a credit score does and how important it is, but let’s take a quick look at what constitutes the credit score, shall we? It is a numerical representation of your credit report, an all-important document generated by a credit bureau. There are currently four credit bureaus in India, each offering a report. A score ranges between 300 and 900, and a higher score is always a plus point.
Lenders consider a score of 750 and above a near-perfect score. This score essentially gives them the comfort of lending to a creditworthy individual and that’s what makes the score so important. How about calling for your free CIBIL report to know where you stand currently?
Factors that determine the credit score
Let’s take a diagrammatic look at the factors which determine the CIBIL score:
Keeping these factors in mind, your next step is to understand how to get a good credit score – and keep it that way.
How to get a good credit score
So, what is it that people who consistently have a high or good score of above 750 do regularly? Is it something drastically different? Here, we clue you in on their habits so that you too can work towards building and maintaining a similar credit score. Read on!
Payment history: It is crucial to make timely payments, so once your loan EMI or card statement is due, pay off the amount on or before the due date without fail. Remember that a delayed payment – or one that is skipped entirely – can pull down your score drastically. If you look at it from a lender’s perspective, they would not want to extend further credit to someone who doesn’t manage their existing debt well. So, set up payment reminders or avail of an ECS facility to maintain a clean repayment track record.
Manage your credit utilisation: While the credit utilisation limit is calculated across all your accounts and not just on a single credit card, remember that it is prudent to stay well within a utilisation ratio of 30 percent. A higher usage indicates that you could be in a spot or more of financial trouble and are heavily dependent on debt to manage your finances.
New credit: Every time you apply for fresh credit, a hard enquiry is made against your CIBIL report. While temporary – say for a few months – each such enquiry will drag your score down a little bit each time. So, ensure that you apply for a fresh line of credit – be it a loan or card – only if you absolutely need it. This also helps you stay away from unnecessarily walking into a debt trap.
Old accounts: Like the saying goes, old is gold! But, in this case, only if it is an account you’ve managed well, such as a credit card that has always had good payment history. Even if you don’t use this card at present, don’t close an old, good account. This can add weightage to your credit score.
Apply for a credit card: If you’re a first-time entrant to the financial world with no credit history whatsoever until now, this is the time to apply for a credit card. This can be your first step towards building a robust credit history. Do make sure that you pay on time and ideally in full, so that the card proves to be an asset over the long run, as far as your credit score is concerned.
Manage a healthy credit mix: When your score is calculated and also when a potential lender looks at this score, they’re happy to see a report that contains a well-balanced mix of all types of credit. This could include both secured and unsecured loans.
Your next steps
Now that you’re aware of what a high credit score can do for you, don’t forget to request for a free CIBIL report at the earliest. To take charge of your financial health it’s important to know just how your credit report fares. Remember that there will likely be a loan for low CIBIL score with some financer offering the option, but that is not the place you want to be.
Take charge of your financial health starting now!