November 7, 2024 · 11 mins read
Santosh Kumar
The importance of a CIBIL score cannot be overstated, as it has a bearing on your ability to get loans, credit cards and, in certain cases, even jobs. Knowing how to improve your CIBIL score based on the areas that affect it the most gives you power over your finances. This blog aims at explaining the top ten CIBIL score factors and their management.
Factors Affecting Your CIBIL Score
Here’s a list of the top 10 factors that can impact your CIBIL score:
Your payment history is one of the most important factors in determining your CIBIL score. It shows how reliable you are as a borrower and accounts for 30% of your score. This gives lenders an idea of how likely you are to pay back loans that you might take out later. Payments late or missed destroy your score, and a record of on-time payments lifts it.
Making payments for every credit card and loan on schedule enables retaining a high CIBIL rating. Missed payments will lower your score by a few points each time, making it more difficult to take out loans later in life. If you have a hard time remembering deadlines, consider setting up automatic payments or reminders to ensure you never miss one.
Circle credit ratioCredit usage ratio is another important component which has an impact on CIBIL regards. The calculation is based on dividing your balance amount across different credit cards by the total amount of available credit limits you have. A low ratio shows you manage your credit well; a high ratio can signal trouble. A good rule of thumb is to always maintain your credit utilization below 30%.
For instance, if the total credit limit on all of your cards is ₹1,00,000, then keep your outstanding balance at less than ₹30,000. If you discover that your utilization ratio is higher than desired, pay down balances or request a higher credit limit, which lowers the ratio without decreasing your utilization.
How Long is Your Credit History: This is another of the scoring criteria for one's length of credit history. It makes up some 15% of the scoring altogether. This is a gauge of how extensive your experience is in using your credit responsibly, and to the lenders, this speaks volumes about you.
Old accounts that have a history of payments are positive factors in your score. The age of the oldest account, the average age of all accounts, and new accounts opened are all factors in this calculation. So, if you are just building credit, keeping the first credit card open may make sense even though you are not using it much.
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The types of credit accounts you hold impact your CIBIL score. Lenders like to see a mix of credit types, such as credit cards, personal loans, auto loans, and home loans. This diversity shows you can manage different types of debt, which can impact your credit score positively. A well-balanced mix can positively reflect on your credit profile as showing experience in handling different types of credit. Of course, you want to take this diversification seriously. To handle different types of credit without overwhelming yourself with new debt is advisable.
If you believe that you need a different kind of credit, it has to be something that helps you towards your goal; for instance, if all you have is credit cards, this is probably an ideal time to add personal loans to the mix of the account types and, thereby, to enhance your score but take into consideration the fact that you will also add more debt.
The lender performs a hard inquiry on your credit report for a new credit application. Such inquiries may reduce your CIBIL score insignificantly, and multiple inquiries in a short time frame might be taken as an indicator of financial distress, leading to further reduction.
Try to space out applications for credit and only apply when necessary to minimize the inquiries. When shopping for a loan, do it in an abbreviated time frame of 30 days, as there is a grace period so that multiple inquiries in any given time for the same type of credit are counted only as one inquiry.
It is important to differentiate between hard and soft inquiries. The fact that hard inquiries can impact your score makes them different from soft inquiries, which do not impact your score. Among them are checking your credit report or pre-approved offers, for example. Reducing the number of inquiries appearing on your report should help you maintain a good score.
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Your existing debt obligations very much affect your CIBIL score. The whole amount you owe against your total income is considered a relevant factor for lenders in determining a borrower's creditworthiness. High debt levels sometimes show financial instability and negatively affect the score.
Pay off outstanding debts, especially those with higher interest rates. This can be a way to reduce your debt burden and increase your score over time. Consider consolidating high-interest debts into one lower-interest loan for easier repayment.
The most effective debt management strategy in popular use is the debt snowball, where you pay the smallest first and make minimum payments on all others. Such a strategy can provide results in a very short period and create a snowball effect, and such rapid successes and momentum increases also make it easier to tackle bigger debts.
Another option is the debt avalanche strategy, whereby one pays his debt with the highest interest. The method saves a lot of money in interest in the end. Creating a budget helps one work out how to have resources to repay debts efficiently.
Credit limits assigned to your credit cards also make up your CIBIL. The higher your credit utilization ratio in your credit score, the higher your limit. However, on the other hand, continuously maintaining the full amount borrowed will also send a bad signal to CIBIL. If the credit card limits are set low, you can even ask for an increase with your lender. This can give you a little elbow room in terms of expenditure while ensuring you do not exceed your good utilization ratio. On the other hand, the lenders may look at it when they accept your request.
A higher credit limit is always to one's benefit, yet it also encourages even more spending. Keep your spending habits disciplined so you do not end up accumulating debts that may harm your score.
Monitoring your credit limits is also important. If you have several credit cards, you should know how much of your available credit you use on each card. This helps monitor your overall utilization ratio and makes smart decisions regarding further applications for credit. Lastly, if you frequently meet your credit limits, plan and review a budget for healthily managing your finances. In this fashion, you would be keeping a healthy credit profile by which your CIBIL score will improve over a period of time.
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As mentioned above, the kind of credit accounts you hold will influence your CIBIL score. A diverse credit mix implies that you can manage various types of credit responsibly, such as credit cards, personal loans, and mortgages. This constitutes around 10% of the overall score. This creates a healthy mix that makes you a more attractive candidate to lenders. Balance is, however important, not to get into debt only as a way to diversify. Only pursue credit types that fit your financial needs and goals.
If you only have one kind of credit, try to diversify your credit profile by applying for a different type of credit with prudence. For instance, if you only have credit cards, you should be considering taking out a small personal loan to help better your mix.
Always make sure that you can take on any new credit responsibly. Before getting any new account, look into your financial situation to decide if you can carry a new burden of additional payments without causing a potential negative impact on your finances.
Remember, therefore, that diversity in accounts is not the sole purpose; managing each of the types of credit responsibly will be important. You'll need to review your accounts regularly to ensure you meet your obligations and have a healthy credit profile.
Defaults and delinquencies affect your CIBIL score adversely. Defaults reveal that you defaulted on payments, which makes you far less credit-worthy. One default would stay on the credit report for a very long time; thus, you cannot get new credits during this period. Avoid defaults by being mindful of budgeting and financial planning. Know how much you have to spend in a month so that you do not overcommit your obligations. And if you fail to service a payment, you have to talk to your lender right away. He or she may agree to have a payment plan for you or give you some form of temporary relief.
For the rest of your life, if you are already at a point of default or delinquency, you want to work on rehabilitating your credit. Continue by being timely with any previous payments and not accumulating much debt until you have enough improvements in your score, perhaps using secured credit cards with a cash deposit needed to open a line.
Monitor the credit report regularly, for you will be able to identify errors or inaccuracies that may be affecting the score. Errors can then be disputed promptly, thereby improving the score over time.
Remember that taking time to rebuild your credit history is a long process but with patience, responsible behaviour towards credit will start establishing your credit profile gradually; thus, it will easily come by loans and other forms of credit in the future.
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Credit report errors often cause severe consequences related to your CIBIL score. For instance, incorrect account information or wrong balances can make you lose creditworthiness. Reviewing a credit report periodically to flag and dispute errors as quickly as possible would be essential.
You can get a free copy of your credit report through CIBIL once every year and take that time to scrutinize for errors that could be weighing you down. If any are found, you are at liberty to dispute it with CIBIL as long as you have documents to support the claim.
Disputing errors in a timely manner will help protect your credit score and increase the chances of securing a line of credit sometime down the road. Usually, disputes are heard and finalized within 30 days from the date that it is filed, as confirmed with CIBIL through further verification.
Apart from error monitoring, you can set alerts regarding changes in your credit report. Most credit reporting services provide this feature, keeping you updated about changes that may impact your score.
Proper credit report management will help you get a good CIBIL score. That is to say, by verifying the accuracy of your report, you can avoid many pitfalls and a good future would be assured regarding health from a financial standpoint.
1. How to get a free CIBIL check?
One can check his CIBIL score free of cost by using websites like the official CIBIL website and a few mobile applications such as Paytm or CreditMantri, through which one can freely access his credit report and credit score.
2. What is a good CIBIL score?
The score on CIBIL ranges between 300 to 900. A score above 750 is very good. For that, you are considered a low-risk borrower; it does not take a lot of time to secure loans or credit cards at good interest terms.
3. How long does it take me to improve my CIBIL score?
Sometimes, it takes longer for the factor contributing towards it. It involves a steady payment history, lesser debt management, and minimizing the ratio of utilization to raise this score. This will grow positively over time. This normally takes months for a noticeable increase.
4. My report has errors; what must I do?
If you find anything wrong with the credit report, you have to challenge it to the credit agency immediately. You shall give them papers about the claim and be sure enough that such amendments are executed on your account.
5. Will Checking my CIBIL Score Affect My Credit Score?
No, checking your CIBIL score is a "soft inquiry," and it doesn't impact your credit rating. Only hard inquiries like the ones lenders make when you apply for credit can lower your score.
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