What are the factors that affect a CIBIL score?
The most important factor in your credit score is your repayment history. Your payment record forms approximately 30% of your credit score. Making your all your credit repayments ( on loans and credit cards) on time and in full plays a substantial role in building a good credit score. Below are some of the important factors that impact your credit score.
- Percentage of timely payments
- The higher the percentage of on-time repayments you make, the better your score will be. Your repayment record is one of the more heavily weighted factors used when calculating your score since a consistent pattern of timely payments denote a reliable borrower. Banks are reassured that there is a high probability that you will make payments on time. By the same token, even one or two late payments can have a negative impact on your credit score as it implies that you cannot be relied on to make on-time payments. Paying all your EMIs, credit card bills and all other debts is a very important factor in gaining a good score.
- Number of negative marks
- A negative mark could denote one of many things – foreclosure, accounts in collections due to defaults in payments, ‘Written Off’ or ‘Settled’ status on a past loan etc. This again is a heavily weighted factor and a relatively large number of negative marks could severely restrict your eligibility for a loan. A negative mark indicates that you have not been able to adequately manage your credit and serves as a warning to potential lenders. It can take years for a negative mark to be erased from your credit history.
- Length of credit history
- When you have a long credit history, banks are reassured that they have detailed and substantial information on your credit behavior. For instance, if you have a credit card for ten years, potential lenders can see your repayment activity on that card for a significant period of time. On the other hand, even if you have good credit history on a two year-old credit card, banks are wary as they do not have sufficient information on your repayment patterns over a long period. It is therefore not a good idea to give up older credit cards as they are the ones who provide a fuller credit picture to your potential lenders.
- Number of hard enquiries
- A hard enquiry is when a potential lender or credit card issuer accesses your CIR to determine whether you qualify for a loan. A single hard enquiry might only marginally reduce your credit score but multiple hard enquiries without corresponding loan approvals denote that you need credit and are applying to several lenders in order to maximise your chances of securing it. The number of hard enquiries is another factor used to determine your score and a large number of enquiries/loan applications in a limited time frame can significantly decrease your credit score.