Realistic tips to help improve your CIBIL score

There was a time when financial fitness was not up there on the to-do list of most people, but that is definitely not the case anymore. One of the factors that determine from a lending perspective just how healthy you are is your credit score. Globally, the credit score not only helps you get a loan or credit card, but can also be the deciding factor in your securing a job, the premium you will pay on your insurance, getting an apartment on rent or even a new mobile phone connection.

In India, while credit scores are not an alien or unfamiliar concept any longer, the usage as of now is mainly restricted to the banking and financial services (BFSI) domain.

What is a CIBIL score?

We’ve touched upon credit scores – what then is a CIBIL score and how does it differ? Well, a CIBIL score is nothing but a credit score, but with CIBIL being India’s oldest credit information company or bureau, the terms are used interchangeably. A score ranges between 300 and 900 and conveys your creditworthiness to a lender, that is the likely of a customer defaulting on the loan or credit card payment.

However, if you wish to call for a copy of your credit report, you can do so from any or all of the credit bureaus, namely CIBIL, Equifax, Experian and CRIF High Mark.

Factors that impact the CIBIL score

Broadly, given below are the factors that impact the score, and hence it becomes important to monitor the score at regular intervals, to ensure the information contained therein is accurate as well as complete. Any discrepancies need to be rectified immediately, so that they do not have a negative impact on your score.

If you look at the chart above, a large chunk taken into account pertains to your repayment history; hence tracking your payment becomes important.

Tips to improve the CIBIL score

Now that we know what constitutes a CIBIL score and the important and relevance it has in our lives, let’s look at how to boost your credit score.

Check your credit report – Once you are armed with a copy of your credit report, is it the first step towards achieving your goal of good credit health. Check this report and ensure all data mentioned therein is accurate and up to date. In case of any errors, you would need to have them resolved with the concerned lender as well as the credit bureau.

Timely bill payment – Whether credit card dues or a loan EMI, make sure that you do not delay payments, or worse, skip making one. This simple practice can fracture your score if not addressed. Set up payment reminders or sign up for auto debit instructions to ensure that all your outstanding dues are cleared in time, on or before the due date.

Clear off debt – If your credit report is riddled with multiple open lines of credit, consider closing them, one by one. Even if this appears to be a tedious process, in the long run it can do wonders for your score.

Retain ‘good’ old debt – While you may do well to clear off outstanding dues, what can go against this effort is closing old accounts with a good payment history. With your repayment track record amounting to as much as 35 percent of your credit report, it is important to maintain an account that is old, and has been serviced well throughout. This indicates your credit responsible behaviour and can help your score immensely.

Track your credit utilisation ratio – The ideal credit utilisation ratio is 30 percent of your overall limit, be it one card you hold or several. To cite an example, if your credit limit is Rs. 1.0 lakh, make sure your spends do not cross Rs. 30,000 as high utilisation of the limit can indicate credit hungry behaviour.

Keep the limits reasonable – While a high credit limit may sound very attractive, it can also tempt you to spend beyond your means, landing you into a possible debt trap. Hence, while a low limit may not serve the purpose of having a credit card to begin with, it is always a good idea to have a reasonable limit.

Maintain a good credit mix – Having a skewed portfolio may indicate credit hungry behaviour to a lender, especially if you tend to lean towards unsecured products such as personal loans or credit cards. Throw in a healthy mix of secured products as well, and you are likely doing your credit score a favour.

In conclusion

Remember though that there is no quick-fix solution to increase credit score. It is an exercise that takes some amount of time and financial discipline. However, once you put your mind to it, it is only a matter of time before your score gets back on track.

When you’re next applying for a credit card or a loan is when your credit score will come in handy. Hence it is never too late to get on the path to good credit health.

 

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Why different types of credit lead to different CIBIL scores

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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