September 9, 2024 · 20 mins read
Santosh Kumar
The term "CIBIL score" represents a 3-digit numeric value considered the most powerful tool to measure one's creditworthiness. The lenders use this tool to check how you handled past credits or loans before approving your loan application. To achieve a good credit score, you must master responsible credit management. For this, knowing what affects your CIBIL score such as your income, age, job stability, and credit history is the first step. It will help you to secure your future finances. Before making any financial decisions, one should always know about the basic fundamental concepts.
This article will give you a rough idea of the factors affecting the CIBIL score, how to understand the CIBIL score, and what you can do and avoid to improve your CIBIL score. It is also important to know where to check your CIBIL score. For this, there are numerous websites offering a free CIBIL score-checking process. Read on for more details about the factors affecting your CIBIL score.
The CIBIL score is a parameter that makes you eligible for a loan. It is basically a three-digit numeric value. It summarizes your past credit record, including your loan or credit card numbers, payment statuses, outstanding balances, etc. The lenders always check the applicant’s CIBIL score before giving a loan. After you repay your loan to your lender, your CIBIL score gets updated. That’s how the cycle continues with your credit management.
Credit information in India is maintained by the Credit Information Bureau (India) Limited, commonly known as CIBIL. That’s why the credit score is often called the CIBIL score.
Your CIBIL score can range from 300 to 900. The higher the credit score, the better the chances of getting your loan approval. 79% of loans are disbursed to customers with a CIBIL score above 750.
Different ranges for CIBIL scores reflect whether the remarks are poor, good, or excellent. A CIBIL score of 900 is excellent, whereas a below 600 credit score is considered poor. If you can manage to achieve a 750+ mark then it is good to go.
Read More: Is 650 a Good CIBIL Score?
Basically, a CIBIL score is used to assess your creditworthiness and trustworthy nature of being capable to repay the amount. It acts as a supporting factor while approving your loans or credit cards. It demonstrates the level of risk associated with approving your loan and credit card requests.
You have to maintain a good CIBIL score in order to get and enjoy all the benefits that comes along with it. One of the topmost advantages of having a good credit score is the easy approval of your application.
The 5 major factors that have an affect on the CIBIL score are
Repayment History: Repayment history contains all the information on past credit payments. If these payments are not done regularly on time then it will have an adverse effect on the CIBIL score. Regular payments of bills will increase the CIBIL score.
Credit Utilization Ratio: The Credit Utilization Ratio (CUR) is the percentage of credit available to use and must be below 30%. A low Credit Utilization Ratio will have a positive impact on the CIBIL score and will get more loan approvals.
Credit Mix: A good mix of credit including secured and unsecured loans will have a positive impact on the CIBIL score. Regular and timely payments have a major effect on the CIBIL score and increase the score.
Number of Enquiries: The lenders check the credit score and do enquiries whenever the borrower applies for a loan. Too many enquiries will have a negative impact on the CIBIL score. Borrowers must avoid applying for too many loans or credit cards at the same time.
Errors in Credit Report: There will be some errors in the credit report that lenders or credit companies might have made while reporting payments or loan status. These errors will have a negative effect on the CIBIL score which is why it is important to keep a regular check for any discrepenciesa dn rectify them.
Factors that do not make any changes in the CIBIL score are:
Savings and Investment: The CIBIL score is only affected when loans are taken as the Credit Report reflects changes in credit. Savings and investment or fixed deposits are not used for the calculation of CIBIL score.
Bounced Cheque: Payment cheques or bounced cheques do not have an affect on the CIBIL score as it is not considered for calculating the CIBIL score.
Debit Card Transactions: CIBIL score is only connected to the credit card and payments related to the credit card. Payments using the debit card will not affect the CIBIL score as there is no loan taken for a debit card.
Income change: A change in the income of a person will not affect the CIBIL score. An increase or decrease in the income will only change spending habits and will have no impact on the credit score.
Demographics: The credit report consists of personal information along with information related to loans and credit of a person. The personal information includes details like address, education, marital status etc. Any changes in the demographics of a person will not impact the CIBIL score as they are not used for calculation of the credit score.
Checking CIBIL score regularly: Checking the CIBIL score regularly will not have any effect on it. CIBIL score must be checked regularly to be updated but it will not have any impact on the CIBIL score.
So far, we have explored what are the factors that affect and don’t affect your CIBIL score. Now, it is time for you to check the most common and important factors that influences your CIBIL score: In general, the factors that affects your credit score becomes the direct influencers of your CIBIL score. It includes your:
1: Payment history
2: Credit history
3: Credit utilization ratio
4: Outstanding debt
5: Errors in credit report
6: Loan settlements or write-offs
7: Repayment history
8: Multiple credit applications
9: Timely repayment
10: Paying bills on time
11: Closing a credit card
12: Paying minimum due
13: Exceeding your credit limit
Payment history impacts your CIBIL score significantly because this criterion itself contributes 35% for the calculation of your CIBIL score. It shows your consistency in repaying the bills and loans on time. If you are doing on time payments, consistently for all the time, it will increase your credit score.
On the contrary, if you are missing a payment or delaying it, it can negatively impact your CIBIL score. Moreover, it will be added to your profile and it can become a negative impression for your creditworthiness. The payment history with timely payment records let the banks and financial institutions understand that you are financially taking proper responsibility. It not only helps to maintain higher credit score but also to avail credit offers and other discounts.
Credit utilization ratio is the percentage of the credit limit that you are using. Usually, it needs to be below 30% to have a good CIBIL score. If your ratio is above 30%, it can negatively impact your credit score. For example, if your total credit limit is ₹1,00,000, you need to try not to exceed ₹30,000 in its usage.
High credit utilization ratio can tell that you are more relied upon the credit and can give negative impression from the lenders. You can keep your credit utilization ratio lower by following some simple steps. It includes paying the bills on time, not closing your old credit accounts, check and monitor your balances accordingly and more.
If you are maintaining a good CIBIL score with a good credit history, you need to keep it. The lengthier the credit history, the more trust you can build with the lenders of banks or financial institutions. It will show them your whole history of maintaining a proper financial status and managing money.
If you close your old accounts, the lenders will not have more information to check your creditworthiness and trustworthiness. Therefore, it can lead to reduced CIBIL score when the details get lesser. A longer history can reveal your consistent payment habit and proper credit usage. You will lose such details if you close your old accounts.
When you are applying for multiple credit enquiries, it will be recorded with your profile and let lenders know by seeing your credit report. Having too many credit enquiries can tell that you are in a financial distress or high credit seeking behaviour.
Applying for one or two credit enquiries can affect your score very little. But applying multiple enquiries within short period of time can drastically affect your CIBIL score. To avoid this, you can apply when credit is necessary for you and when you have done enough research to find if this will suit you. If you have already applied for too many credit enquiries, then it is advisable for you to space out sometime and try applying later. This can prevent from reducing your CIBIL score any further.
The CIBIL score of a buyer determines the chances of getting their loan application approved at low interest rates. The amount of loan to be taken will also impact the credit score.To get better offers on home loans, buyers must have a CIBIL score of 750 or above. A low CIBIL score will lead to a less percentage of the house value as a loan but a higher CIBIL score will give:
1: Low interest rates
2: Better tenure
3: High loan amount
4: Easy processing or home loan
5: Better negotiating power
Payment of home loans is crucial for maintaining a good CIBIL score. Delaying or missing payments can have a negative impact on the CIBIL score and lower the chances of getting loans approved in the future and adversely affect the creditworthiness of the person.
Job loss does not directly affect the CIBIL score but can put a financial strain which has indirect implications. Unable to meet financial obligations will lead to difficulties like delayed or missed payments which will negatively impact the CIBIL score. Moreover, a job loss will increase the reliance on credit which will provide only temporary financial relief but have an adverse effect on the credit score. The 2 key factors that the CIBIL score is affected by are
Credit Utilization: credit utilization is the percentage of credit available to use. A high credit utilization ratio signifies a financial strain and will negatively impact the CIBIL score which is why it is crucial to keep the credit utilization ratio as low as possible during unemployment by limiting the use of credit cards and paying off balances promptly.
Payment History: payment history also plays a crucial role in determining creditworthiness. Delayed or missed payments will have an adverse effect on the credit score. It is vital to understand and prioritise timely payments even during times of financial difficulties.
Some of the proactive measures to take to help maintain credit score and financial stability are:
Alternative source of income: Exploring alternative income sources might be one of the best options to protect credit health and sustain financial stability.
Emergency funds: Consider the use of emergency funds to avoid accumulation of debt and cover all other expenses.
Reach out to creditors: Get in touch with creditors who can offer modified payment plans for a temporary relief from the financial pressure.
Understanding the indirect consequences of job loss on the CIBIL score and taking measures to manage credit usage responsibly is vital. A person can safeguard their credit health by using the right strategies and financial solutions
In this section, learn what affects your CIBIL score:
1. Past record of your payments: Failure to repay loans or EMIs can bring down your credit score. Be aware of the EMI schedules to avoid any negative impact. You can try the autopay function or reminder. Consistent on-time payments of loan EMIs has a high impact on the CIBIL score.
2. High credit utilization: A higher credit utilization limit indicates a mounting debt unfavorable to your score. You must keep your utilization limited to 30%. Having more than that will negatively impact your score.
3. Credit mix: Having a good mix of secured and unsecured loans generally has a positive impact on your CIBIl score, but the impact is low.
4. Loan Inquiries: Too many loan inquiries could harm your score as they suggest a potential increase in your debt. This shows you are intending to take a lot of loans. However, it doesn’t have a huge impact on your credit score unless it is a hard inquiry.
Read More: Is 720 a Good CIBIL Score?
Before you get the answer to your question about how to know your CIBIL score, you must understand the importance of maintaining a good CIBIL score. The importance of maintaining a good CIBIL score is discussed below:
1. Improves Loan Eligibility: A good CIBIL score is very important to qualify for a loan. Having an exceptional credit score means that you are a responsible borrower who is skilled enough to manage your own financial decisions. Lenders also prioritize those who can manage their debts, always pay on time, and show responsible credit management. Thus, they offer those borrowers their best deals and the lowest interest rates.
2. Low interest rates: When you have a good CIBIL score, lenders always offer loans at low interest rates. A good credit score can also give you an advantage when negotiating loan interest rates.
3. Rewards: If you have a good CIBIL score, you will get access to premium credit cards that will give you various rewards and benefits. Once your credit score is above 700, lenders will offer you credit cards with great benefits.
4. Future-proof Credits: It is essential to maintain a good CIBIL score before planning to take any loan or credit card. Having a higher credit score is always your asset or investment for your future financial spending. It becomes more important when you are planning to take a secured loan, such as - home loan, car loan, mortgage, etc. Giving priority to a good credit history will open the door to future-proof finances and numerous opportunities.
Read More: What is the Use of CIBIL Score?
Here are the factors affecting your CIBIL score:
1. Payment History
2. Owe to lenders
3. Credit Type and Duration
4. Credit Mix
1. Irresponsible Payment Behaviour: Your past payment record can have the biggest impact on your credit score. Timely EMI and credit card bill payments are crucial if you want to maintain good credit health. According to Financial Express's CIBIL analysis, if you are in arrears for 30 days, it can lower your credit score by 100 points. In case you are dealing with multiple loans and credit cards at the same time, we recommend you set reminders to avoid any missing or late payments. If you ever miss a payment or pay it later than the scheduled date it can negatively impact your credit score. It may be an indication to the lenders that you are capable of handling your repayments.
2. Soaring Credit Utilization Percentage: One of the golden rules you should follow is to monitor your credit utilization closely. It is the ratio of the credit you use to the credit limit you have. According to experts, ideally, you should not use more than 30% of your credit limit. For example, if the limit for your credit card is Rs 1 lakh, then you can spend around Rs 30,000. If your credit utilization limit exceeds 50%, it will negatively affect your credit score. A higher credit risk sends a red flag to lenders because it indicates that you are at higher risk.
3. Outstanding Debt: You should never forget to clear off any outstanding debts. Your score will be affected when outstanding debts appear on your credit report. It is recommended that outstanding debts be paid off, even if the amount is small.
4. Pay only the Minimum Amount Due: The minimum amount due is a small portion of the principal amount that is outstanding each month. If you constantly pay the minimum of the due amount, it will affect your score. Paying only the minimum amount to roll over your debt will increase the interest on your balance. Therefore, it is recommended that you pay your credit card debt in full. This also indicates poor repayment behavior.
5. Frequent Applying for Loans: When a debtor asks for any form of debt, the first thing the lender does is check your creditworthiness, and they do this by pulling out your credit report. This is called a hard inquiry. If you submit more than one application, this will mean that multiple credit inquiries are happening at the same time. These hard inquiries will be reported and will affect your score negatively. This will leave an impression that you are credit-hungry.
6. Not Having a Credit Mix: You must have both secured and unsecured credits. For example, collateral loans like car loans and home loans are secured ones, while credit cards are examples of unsecured loans. It can only affect your score if you have different types of credit. Having a healthy mix of credit also means having experience with two different types of credit. Lenders consider this.
7. Credit Age: Your credit history includes all the years since you first opened a credit account. Having a long credit history can help lenders decide when to give you credit. It's best to focus on building your credit early on because you'll have a good credit history when you apply for a home or car loan.
8. Close your old Credit Card Accounts: To have a good credit history, you can use credit cards as a tool. However, when you close an old account, you eventually lose the long credit history associated with it. So, if you've had the card for many years, it's best to keep it open as long as possible.
Read More: Can Gold Loan Affect Your CIBIL Score?
Getting a good CIBIL score requires knowing the basics and managing your financial habits. You must keep the factors affecting your credit points under your control. This is how you can build and maintain a strong CIBIL score that reflects your financial discipline.
Regularly monitoring your CIBIL score is another crucial step. With various online platforms available, you can easily check your score, review your credit report, and identify any discrepancies that might impact your creditworthiness. If you find any errors, rectifying them promptly can prevent unnecessary damage to your score. This proactive approach ensures that your credit profile remains accurate and up-to-date.
Furthermore, maintaining a healthy credit mix and keeping a good equilibrium between all your secured and unsecured loans is very important. Diversifying your credit portfolio demonstrates your ability to manage different types of credit, which is favorable in the eyes of lenders. Having a lower credit utilization percentage which can extend up to 30% maximum —is key to maintaining a high score.
In the end, a good CIBIL score translates to better financial opportunities. It reflects your credibility, whether it is a loan, credit card, or exam. It also leads to lower interest rates, higher credit limits, and faster approvals. It gives you financial flexibility and opportunities.
Who Calculates your CIBIL score?
Ans. The TransUnion CIBIL credit bureau calculates the CIBIL score after considering various factors like payment history, loan type, loan tenure, etc. In India, there are four major Credit Information Companies or CICs, such as TransUnion CIBIL, Equifax, Experian, and CRIF High Mark.
For how long is a CIBIL score valid?
Ans. CIBIL retains a credit history of an individual for up to 7 years. This information is how lenders determine your creditworthiness. CIBIL does not delete names from the defaulter list, and hence, it is necessary to build back a good score by working on your credit grade if you are listed there.
Who Provides Data to CIBIL?
Ans. A CIBIL Report is a consolidated record of your credit and payment history that the Credit Information Bureau (India) Ltd has maintained from information provided to it by banks and financial institutions. This information enables loan providers to make faster decisions while maintaining objectivity in evaluating your credit risk. The lenders update the debtors’ credit report on a monthly basis and based on that the CIBIL score is also updated monthly.
Is CIBIL a Government or Private Organization?
Ans. CIBIL is not a government organization, but it operates under an ethical and regulated governance framework from the government. It is a regulation of the Government of India Act and RBI-authorised rule.
How many types of CIBIL Reports are there?
Ans. CIBIL provides customers with credit scores, credit reports, business insights, etc. CIBIL provides Portfolio Review Reports, Corporate Credit Information Reports, CIBIL Bureau Analyzer, and other services for companies.
How often is my CIBIL score updated?
Ans. Your CIBIL score is updated on a monthly basis. The lenders provide monthly data to the CIBIL.
Do pre-approved loan offers affect my credit score?
Ans. No, if you are getting pre-approved loan offers, you do not need to worry about it. This doesn't affect your CIBIL score. You are getting pre-approved loan offers because you have a good credit history over time. So, be happy that you're getting it.
Where to check my CIBIL score?
Ans. You can "check my CIBIL score at ZetApp" on Google or download the ZetApp. On the website you have to enter your personal information and check your CIBIL score. On the app, you must sign in first and then log in with your registered credentials. Then you have to navigate to the CIBIL score-checking option and click on it. Provide the required information and check your score.
If you are missing even one of your EMI or credit card payment, it can affect your CIBIL score. You can see the reduction in the score by 50 to 100 points depending upon your existing score.
To maintain a good CIBIL score, the ideal credit utilization ratio needs to be below 30% of your total credit usage limit.
Yes, closing an old credit card account can reduce your CIBIL score since it reduces your credit history and its length. Having them opened with minimal usage will help you secure a good credit score.
The credit card inquiry may stay on your credit report for up to 2 years, but it can affect your credit score for 12 months.
The soft inquiries involve checking your own credit score and won’t affect your credit score. On the other hand, hard inquiries are done by the lenders to check your credit when you apply for a loan or credit card. It can affect your credit score.
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