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Top Factors that Affect your CIBIL™ Score

Since your CIBIL™ score is a very important factor in your loan application process, you have to understand the factors affecting your credit score.

The primary factors affecting your credit score are: 

  • Payment History
  • Credit Utilization Ratio
  • Credit Mix 
  • Multiple enquiries on your credit
  • Length of your credit history

Payment History

Your payment history is the most important factor of all. An impeccable payment history indicates that you are a responsible borrower. The lender is assured that you are a creditworthy borrower letting him offer you the best of loan terms and interest rates. Hence, ensure that you do not default on any payments.

Maintain a record of all your monthly payments to make sure they are made on time. Payment default, even if it is a genuine omission, has a negative impact on your CIBIL™ ranking. To ensure that monthly EMI payments are made on time, you can use resources such as auto-debit, standing orders, or NEFT mandates. When making a cheque payment, make sure to send it in plenty of time before the due date to allow for the clearance period.

Credit Utilization Ratio

The credit utilization ratio is the amount of credit you use from the total credit limit you have put together. Experts advise that you keep your credit utilization at 30% to ensure a good credit score. Credit utilization of more than 50% does not bode well with lenders. A high credit exposure means higher credit risk for the lenders.

Credit Mix

Credit mix, or the diversity of your credit accounts, is one of the most common variables used to calculate credit scores. It's also one of the least well-liked by consumers. Having multiple credit accounts, such as a home loan, personal loan, and credit card show lenders that you can manage multiple types of debt at the same time. It also helps them gain a better understanding of the financial situation and willingness to repay debt.

While having a less diverse credit portfolio would not automatically lower your scores, the more credit types you have, the better (as long as you pay on time). Credit mix accounts for 10% of your credit score and can play a part in helping you reach a high score.

Multiple enquiries on your credit

If your credit report shows a lot of hard enquiries in the recent past, it will have a negative effect on your credit score. Multiple hard enquiries mean that you are desperate for credit, which makes you a bad risk. When you have increased credit, it may indicate an increase in your credit burden and hence your credit score will go down.

Length of your credit history

The credit score is available for new borrowers too. However, you need to have credits for some time to build a healthy credit score. Your oldest credit account has an impact on your credit score. When you have a long credit history, the creditors are assured that you are good at managing your debt and that has a positive impact on your credit score. Closing down old credit accounts will decrease your credit score. Hence, it is advisable to maintain your old credit cards with minimum transactions to keep your credit score healthy.

What are the factors that don’t have much impact on your credit score?

While we have seen the primary factors that affect your credit score, we should also learn the factors that don’t have much effect on your credit score:

  • Income – Your direct income does not have much impact on your credit score. Your CIBIL™ score basically indicates your debt management ability rather than your earning capacity.
  • Bank Balance – Your bank balance also doesn’t have much effect on your credit score.
  • Employment type – It does not matter what is the source of your income while calculating your credit score.

Similarly, your age, marital status, or your debit and prepaid cards don’t have any impact on your credit score.

Can I improve my CIBIL™ Score? How can I do that?

Many people have a low CIBIL™ score and can still get loans and credit. But if you want to get the best loans and offers, you need to have a credit score of at least 750. You can easily boost your credit score by taking a few easy steps. Maintaining a healthy credit score requires disciplined credit management. While you cannot improve your credit score instantly, following these measures will have a significant impact on your CIBIL™ score. A fair time to recover your credit score is 4-12 months.

Here are some simple steps you can take today to start improving your CIBIL™ score:

Closing down loans that are eating into your credit utilisation ratio: Close any long-term loans or credit cards that are causing your bad credit. Multiple liabilities on your credit report have a negative impact on your credit score. You could pay off tiny, long-term loans or credit card balances that are having a major effect on your credit report. This will be reflected in your subsequent credit reports and is well worth it.

Check your CIBIL™ credit rating on a regular basis: Make sure to check your CIBIL™ score on a regular basis to ensure that the report contains correct details. If you discover any mistakes or omissions, you should get them corrected as soon as possible so that they do not have a negative impact on your CIBIL™ ratings.

Do not get behind on payments: Keep track of all your monthly payments and make sure they are delivered on time. Payment default, even if it is a genuine omission, has a negative impact on your CIBIL™TM ranking. To ensure that monthly EMI payments are made on time, you can use resources such as auto-debit, standing orders, or NEFT mandates.

Restrict your credit utilisation: One of the most effective ways to improve your credit score is to refrain from using your credit card to the full limit. Limit your monthly credit card bill to no more than 50% of your credit limit. For example, if you have a credit limit of Rs. 1 lakh per month, make sure your monthly bill does not exceed Rs. 50,000.

Refrain from making multiple loan/credit card applications in a short period of time: Having so many inquiries in a short period of time is not looked at favourably. What would a lender think if you did a credit card inquiry, a personal loan inquiry, and a home loan inquiry all within a few months? It means that you are desperate for credit and are looking for several sources of credit. One way to avoid a decrease in your credit score is to avoid having a large number of new credit applications in a short period of time.

Keep an eye on your joint applicant's spending habits: If you don't keep an eye on your joint applicant's spending habits, you could end up bearing the brunt for no fault of your own. In such a scenario, if you are a joint loan application from someone else who has defaulted on payments, you will also experience a decrease in your CIBIL™TM or credit score as reflected in your study. The best way to avoid this is to ensure that all cardholders pay their loans and credit cards on time and to avoid applying for joint credit terms.

Request an increase in your credit card credit limit: You can request an increase in your credit limit by contacting your credit card provider. Increasing your credit limit would allow you to better control your credit-to-debt ratio without negatively impacting your credit score.

FAQs

1. What is the perfect CIBIL™ score for obtaining a credit card?

There is no minimum CIBIL™ score needed to qualify for a credit card. Each bank/credit card company has its own set of standards for accepting a card application. In general, if you have a credit score of 750 or higher, you have a good chance of being approved for a card.

2. Can I get a loan despite my low CIBIL™ score?

A loan with a CIBIL™ score as low as 650 is possible. It is tough, but it is not impossible. It is up to the bank's discretion. However, if you apply for a loan with such a poor credit score, you can be offered unfavourable terms in terms of interest rates, loan size, and other loan offers.

3. What are the 5 top factors affecting my CIBIL™ Score?

The primary factors affecting your credit score are:

  • Payment History
  • Credit Utilization Ratio
  • Credit Mix
  • Multiple enquiries on your credit
  • Length of your credit history

4. Which bill payments affect my CIBIL™ Score?

The bills that affect your CIBIL™ Score are your credit card bills and loan payments.

5. What helps me in building my credit score faster?

If you want to improve your credit score, follow these simple steps:

  • Don’t default on your bill payments
  • Restrict your credit utilization
  • Request for an increased credit limit
  • Keep an eye on any errors on your credit report
  • Have a healthy balance between secured and unsecured loans

6. What CIBIL™ score is considered the best?

There is no ‘best CIBIL™ score’ per se. However, a credit score above 750 is considered healthy and can get you the best loan offers and credit cards.

7. Is it possible to get credit if I have no or a low CIBIL™TM score?

Yes, it is plausible. Even if you don't have a CIBIL™ score or you don't have a credit history, you can get loans from the bank if you have a salary account with them.

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