Very often people are startled to find out that they have a low CIBIL score and they begin to wonder if there are ways to improve credit score. One must understand that building credit is a time consuming activity and requires your persistent efforts. Although there are no quick fix solutions, but there are indeed ways by which one can catch up with the goal of having an ideal score. But before you learn of ways to increase your CIBIL score, you must understand what all fuels your score and on the basis of what are you marked.
Your CIBIL TransUnion Score & CIR
Your score will be between 300 and 900 with 300 being a poor score while 900 being an ideal one. This three digit score tells a lender on how well have you done on your credit front, how diligent were you in your repayments, were your payments on time or were they late often, whether you display a credit hungry behaviour or do you have a portfolio that is skewed more towards unsecured loans. All this and more can be deduced by a lender by going through your score and Credit Information Report (CIR) to judge how likely are you to default on your repayments.
Factors deciding your score
Now, a common question arising in anyone’s mind is what the factors that help determine a credit score are. There are 5 major elements that are considered to impact your credit score. These are:
- Timely repayments: The first and the foremost thing to impact your credit score is how well within time have you repaid your loan instalments or credit card dues. Any misses or defaults in payments within the last couple of years will lead to an adverse impact on your score because it would mean that you are facing difficulty in servicing existing debt. This may be due to either insufficient funds or due to you forgetting to pay in time. In either case, there will be a downward impact on the rating. Although there are quite a few ways to enhance your credit score but being on time has the maximum weightage in the calculation of your score. So next time, make sure you don’t miss any payments.
- Age of Credit: This is why we mentioned above that building your credit history is a time taking process. Because lenders are interested in your track record as a user of credit, proving to them that you are an old horse might fall in your favour. For example, an old credit card is significant proof that you have been using and maintaining credit for quite some time. It is possible that you are attracted by better deals on latest credit cards. However, keeping a credit card that you have been using since long will have a constructive impact on your credit score. This is because it shows you in a positive light and prospective lenders expect you will continue repaying debt just as you have been doing in the past.
- How much credit limit is being used: Like the old saying “Cut your dress according to your cloth” one must but of course be careful in using credit. It might be tempting to use your entire credit limit but a prudent credit user will only use what he or she can repay. For example, you may have a larger sanction limit on your loan but you ask for only 60% to 70% of it. Or, if you spend large amounts on your credit card but are only able to pay minimum dues, then your outstanding bill will keep rolling over and build up to a colossal figure. This might put you in unnecessary pressure and might damage your score as well.
- Skewed towards Unsecured loans or Secured loans: A lot depends on the percentage of secured loans and unsecured loans in your debt portfolio. It might seem easier to obtain an unsecured loan like a personal loan, credit card or an education loan for MBA, but they do carry a higher rate of interest. Due to a higher interest burden, the amount of outstanding dues is always higher. On the other hand, a secured loan like a home loan or car loan, where there is an underlying asset, the rate of interest is relatively lower and therefore its payments account for a smaller figure in the portfolio. Secured loans have a positive impact on the credit score.
- On the lookout for more and more credit: By doing so, you display an insatiable hunger for living off credit. The debt taken has to be returned to the lender with additional interest money. We all have finite means of earning and limited income. Unless, you can justify your repayment capacity, this behaviour too adversely affects the credit rating of an individual. Seeking more credit means a declining repayment ability and an increased chance of default.
By assessing your credit report, a lender makes up his mind on whether to approve your loan or to adjust their terms based on it or to decline the proposal completely. Believe it or not, but you can break or make your credit health depending on how well you manage your credit score. The more conscious you are of the way you handle your finances the better it will be for a credit friendly future.
Happy Credit to you